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Government and Economy

Sharp's Transfer of its Management Rights to Hon Hai Takes a Sinuous Course
—How Should Japanese Businesses Deal with M&A Bids from Overseas Firms?—

Kazunori Suzuki
Professor at Waseda University Faculty of Commerce and Graduate School of Business and Finance (Waseda Business School)

Sharp Corporation announced its merge with Hon Hai Precision Industry Company as a final result to recover from its financial strait. According to newspaper reports, Hon Hai proposed to provide financial support of approximately 700 billion yen. Hon Hai’s conditions for the bailout included acquiring Sharp’s common shares, worth about 500 billion yen, and its preferred shares. This bid exceeded an offer of 300 billion yen from Innovation Network Corporation of Japan (INCJ), a public-private partnership between the government and major corporations, who appeared to be the front-runner in the bidding.1 However, negotiations with Hon Hai have failed to reach an official agreement on due to the revelation of contingent liabilities (as of when this article was written), exemplifying how managers and employees in Japanese businesses have an aversion towards mergers and acquisition of foreign capital. This article will discuss how Japanese businesses should approach M&As involving foreign-owned companies.

Firstly, charts 1 and 2 indicate changes in the number and value of M&As involving Japanese companies, respectively. According to this data, while the number of large acquisitions by Japanese companies of foreign-owned companies has rapidly increased during the past years, the value of acquisitions by foreign-owned companies of Japanese companies has remained almost at the same level of approximately 1 trillion yen. In an attempt for a break through, the Shinzo Abe administration has announced its policy goals to encourage foreign direct investments in Japan through a program called “Invest Japan.” If an agreement on Sharp is made, the value of this single deal alone will equal the combined annual value of M&As that have been completed by foreign-owned companies in Japan during the past several years. It also provides a good example of successful foreign direct investment in Japan.

Chart 1: Number of M&As Involving Japanese Companies

Chart 2: Announced Value of M&As Involving Japanese Companies

In spite of Hon Hai’s interest to acquire Sharp since last year, it has been reported that INCJ has almost finalized a rescue plan for Sharp made in late January. Of course, special circumstances such as Sharp’s distrust on Hon Hai’s stance towards negotiations may have prevented Sharp from making quick decisions. Yet, a question remains on why a proposal made by a beaurocratic fund intruded on a private company’s proposal. This suggests a deep-rooted distaste for foreign-owned companies in Japan.

According to a report2 compiled in 2013 by consulting firm Accenture PLC, Japanese companies expressed ambivalent reasons of discomfort towards corporations overseas, along with its hesitation towards foreign management policy, unrealistic budgetary goals made by foreign companies, benefit cuts, and downsizing. Furthermore, in Sharp’s case, a concern for technology and patent drains urged INCJ to attempt combining Sharp with its ailing company and major manufacturer, Japan Display Incorporated (JDI). This was also an effort made to restructure Japan’s entire liquid display business.

While Japanese companies are active in acquiring companies, they have a strong tendency to be inflexible about selling off their unprofitable units. Even if they decide to do so, it is with reluctance and a growing sense of crisis after realizing there's no other way out. To many corporate managers, selling off profitable units is still a difficult decision to make. There’s even more struggle for Japanese managers to accept a purchase from a foreign capital from an innate sentiment of prejudice.

On the other hand, selling off an unmotivated business unit which has repeated restructuring efforts and lost talented employees is not an easy task. The profit made will be meager. What matters is for a company to distinguish between its core and non-core business and sell the latter. If the buyer is able to continue employing employees, expand its business, and turn the unit into a profitable one, Japanese companies should consider M&As offers regardless of its origin. Uncertainty towards foreign capital is understandable to some extent, but corporate managers should objectively determine the best choice for Japanese workers.

The beaurocratic fund’s plan to buy Sharp from the fear of technology drains is unacceptable. Given, many countries place restrictions on foreign-owned companies if it involves risks such as technology drains. In this respect, governments should restrictions on acquisitions legally by establishing clear standards and procedures to comply with. With that said, a public-private partnership intervening a private corporation under the "All-Japan" slogan will surely characterize Japanese market as discriminatory against foreign investments.

The current settlement will have a positive impact on revitalizing Japan's M&A market in the long run, but some experts argue Japanese companies should avoid negotiations with foreign-owned companies for sell-offs, using Sharp’s current commotion with Hon Hai as an example. Will this dramatic acquisition become a successful example of direct foreign investment or establish a stronger disapproval towards foreign capital? The decision is in the hands of Sharp.

^ 1  Since INCJ's proposal included the forgiving by financial institutions of debts worth \300 billion or more, one cannot simply compare Hon Hai's \700-billion plan with INCJ's \300-billion one and discuss which is better. For details, refer to materials such as Part 67 of Yasushi Ando's "Shin-Kinyu Rikkoku Ron (An Essay on Making Japan a Country Truly Built on Financial Services)," posted on Diamond Online on March 9, 2016 (in Japanese).
^ 2  Accenture's "An Investigative and Analytical Report on Sophistication of Strategy for Investments in Japan," March 2013 (in Japanese, downloadable from the Ministry of Economy, Trade and Industry's website)

Kazunori Suzuki
Professor at Waseda University Faculty of Commerce and Graduate School of Business and Finance (Waseda Business School)

[Brief history]

Kazunori Suzuki is a professor at Waseda University Faculty of Commerce. After graduating from the University of Tokyo with a bachelor's degree in law, he joined the Fuji Bank, Ltd. He obtained a master's degree in business administration from INSEAD (with distinction) and a Ph.D. from the London Business School. At the bank, he was responsible for developing corporate valuation models for M&As. Suzuki came to Waseda after his position at Chuo University Graduate School of International Accounting in April 2012.His field of expertise is corporate finance, corporate mergers and acquisitions (M&A). He is also a member of the editorial board for Securities Analysts Journal and a valuation advisor at Mizuho Bank's Corporate Advisory Division. His major publications include Valuation in Practice, published by Diamond, Inc.

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