The epitome of Kabuki drama
The absolute climax of M&A drama unfolded this week in Japan, after a sequence of events that comprised all the ingredients of a great tragedy: past glory, decline, hope, power, notional pride, salvation, betrayal, distrust, deceit and humiliation. End of Act One. The curtain has gone down, leaving the audience wondering how the plot will unravel.
What a coup de théâtre ! The audience is split: thrill and applause from those who fought to keep Sharp in Japanese hands, and a gasp of horror from those who saw in Foxconn the face of salvation, now slipping away, possibly never to return. In the back corner of the stage, one actor has until now remained silent throughout this drama: Apple.
Rise and (sharp) fall
A century of existence saw Sharp rise from producing belt snap buckles in 1912 and mechanical “ever-sharp” pencils shortly afterwards, to becoming one of the world’s leading manufacturers of consumer electronics. From year 2000 onwards, Sharp gradually refocused from producing a wide range of appliances to becoming a leader in LCD flat-screen technology and investing heavily in that sector in the hope of reaching market dominance. But the economic downturn of 2008 changed the world and left Sharp with unaffordable debt, precipitating the company into rapid decline and colossal losses year after year. In 2012, Sharp’s centennial celebration corresponded with the launch of the largest ever LCD screen, measuring 80 inches, but also the company’s worst ever financial results: a loss of US $ 4.7 billion.
Then enter two foreign actors in our Japanese Kabuki drama – Foxconn, and behind it: Apple. In 2012 already, Foxconn, a Taiwanese subcontractor in charge of assembling Apple’s iPhones, offered Sharp US $ 806 for a stake in a plant in Sakai that produced some of the screens fitted on Apple’s iPhones. This was Foxconn’s bid to become a key component supplier to Apple, rather than a mere assembler. But the continuing decline in Sharp’s share price soured the deal, the two parties did not reach an agreement on the amount Foxconn should pay per share and Foxconn finally retracted the offer. This first honeymoon was therefore short-lived.
Saving a national icon
Since the 2012 failed deal, Sharp’s decline has continued steadily and now requires urgent remedial, not only to save the company from bankruptcy but also because Apple cannot accept losing one of its three display suppliers, the other two being Samsung and LG who, perversely, are also competitors of Apple on the profitable smartphone market…
After the perceived betrayal of 2012, it was no surprise that Sharp initially rebuffed Foxconn’s renewed approach, and banked on salvation coming from the state sponsored investment fund Innovation Network Corp of Japan whose start-up Japan Displays is now one of Sharp’s key competitors in Japan. Merging Sharp’s and Japan Displays’ production and research facilities and disposing of peripheral activities would create a Japanese powerhouse capable of developing the next generation of displays. A very much preferred scenario for those keen on maintaining that precious knowhow in the land of the rising sun, and one which Sharp publicly pretended to favour, in spite of a number of contradictory statements and rumours which should have given us the hint that the rest of this saga would end up in a monumental public relations fiasco.
Money speaks louder than words (even in Japanese)
So what went wrong to the extent of prompting Sharp’s leaders to ditch national pride and embrace the white knight who once again arrived from Taiwan to sweep up the remains of a once mighty industrial giant?
Some will say that folding the 104 year old Sharp conglomerate into the Japan Displays newbie one hundred years its junior could be seen as somewhat humiliating and contrary to Japanese core values. Foxconn’s founder Mr Gou understood this well when he declared: “We want to help Sharp. Sharp has a 100 year history […] We want to keep it alive for maybe another hundred years. This is my goal”.
From a more tangible perspective, Foxconn’s offer was substantially higher than that of Innovation Network Corp of Japan, and offered the prospect of closer ties with Apple whose main device assembler would become a provider of the next iPhone generation’s most important component: the screen.
When “Organic” means more than just “Green”
For Foxconn as well as for Apple, having a controlling stake in Sharp would secure future access to OLED technology, in which South Korean manufacturers currently hold the lead and which will form the core of future device displays. OLED stands for “organic light-emitting diode”: doing without any back light allows screens to be much thinner than those using LCD technology.
This will be a crucial asset in the on-going race between Apple, LG and Samsung; Foxconn needs Apple to remain in the lead of that race. Consequently, once the shockwaves of the last week have subsided, saving Sharp will become a key priority again, requiring everyone to forget who lied to whom, who withheld or fabricated information, who was right or wrong or merely politically correct.
In the meanwhile, the financial community has expressed its displeasure by slashing Sharp’s share price by some 27%. In a last attempt to resuscitate the deal, Sharp’s CEO Kozo Takahashi was on his way to Taiwan on Friday night to resume talks with Foxconn. Having reached the point where no further loss of face is possible for Sharp’s top team, maybe the Kabuki masks can now be dropped to give way to serious business conversations. A solution must be found. Fast.
The interval is over. The curtain will be lifting soon for Act Two. The audience is holding its breath …