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State-backed agency bid for Sharp beat out by Taiwan's Hon Hai

At about 5 p.m. on Feb. 25, President Kozo Takahashi of struggling Japanese electronics maker Sharp Corp. was about to get into a car in the basement of the Osaka-based company's Tokyo branch. Before disappearing into the vehicle, he spoke tersely with the gathered group of reporters, saying, "We've passed a resolution to accept Hon Hai's offer. It was a unanimous decision."

    By Feb. 5, fierce competition over Sharp between the state-backed Innovation Network Corporation of Japan (INCJ) and Taiwan's Hon Hai Precision Industry Co. had mostly been decided. Hon Hai Chairman Terry Gou had visited the Sharp headquarters in Osaka and met with Takahashi; Sharp had prepared for Gou's visit with one of his favorite dishes, gyudon, a bowl of rice topped with stewed beef.

    Following the meeting, Gou announced that he had signed an agreement giving Hon Hai preferential negotiating rights. Sharp subsequently denied that such an exchange had taken place, but Hon Hai ultimately won out through its characteristic tenacity.

    INCJ initially looked to have the upper hand over Hon Hai in takeover negotiations with Sharp, but the talks hit a watershed moment on Jan. 30. At Sharp's headquarters, INCJ Executive Managing Director Koichiro Taniyama -- who was convinced that there was strong support for INCJ's restructuring proposal -- gave a passionate presentation to Sharp's board of directors on INCJ's commitment. "We will not only help Sharp become the world's top liquid crystal manufacturer, but will also promote growth in new areas of business, such as the Internet of Things (IoT)."

    After the presentation, an outside member of the Sharp board pointed out that a lag between the INCJ's decision to invest and the start of actual investment would lead to a capital shortage, and asked, "What's INCJ going to do about that?" It was then that Taniyama realized the landscape had shifted in Terry Gou's favor.

    Shortly before the fateful meeting, Hon Hai's Gou had proposed that his company would offer over 600 billion yen in assistance to Sharp, to be put toward comprehensive rehabilitation of the company. Gou had also stated that Sharp employees would be kept on board, and that financial institutions would not be asked to take on additional burdens, inviting praise from at least one bank executive who said there was a world of difference between INCJ's and Hon Hai's proposals.

    Sharp management quickly began leaning towards Hon Hai's offer, and following a board meeting on Feb. 4, Sharp President Takahashi indicated that the company's focus was on the Hon Hai proposal. This unexpected turn of events rattled INCJ, and INCJ Chairman and CEO Toshiyuki Shiga made attempts to convince Sharp's main creditor banks to stick with his firm's proposal. However, the tables, once turned, could not be turned back.

    When Sharp, faced with dire financial circumstances, began considering splitting off its liquid crystal division in the summer of 2015, INCJ, with the nudging of the Ministry of Economy, Trade and Industry (METI), looked to merge major liquid crystal manufacturer Japan Display Inc. (JDI) with Sharp's liquid crystal division (LCD) to create a Japanese LCD giant.

    "There are some things the state must protect," one senior METI official said. The aim was to prevent the outflow of Japanese liquid crystal technologies to foreign corporations, and strengthen JDI's competitive edge.

    Around the same time, it emerged that Toshiba Corp., which had been hobbled by revelations of an accounting scandal, was looking to sell its household appliance division. METI drew up a proposal for the INCJ to invest not only in Sharp's liquid crystal division, but Sharp Corp. itself, effectively taking over the restructuring and resuscitation of Japan's electronics industry.

    During Japan's postwar period of rapid economic growth, METI's predecessor, the Ministry of International Trade and Industry (MITI), led the development of industry. But since then, the economy has grown and private corporations have gained muscle, and METI does not have the influence that its predecessor once did. Because there remains strong hope within METI for the restructuring of the Japanese electronics industry in order to compete against rising Chinese and South Korean corporations, however, the ministry and INCJ viewed Sharp's and Toshiba's respective troubles as a chance for government-initiated rebuilding.

    "We're not just thinking about Sharp. We're considering both our first and second steps," a senior METI official said. INCJ Chairman Shiga said at a business community party at the beginning of this year, "This year we'll be marking the first year that we form an alliance in the face of tough competition. (The electronics industry) has the technology, but cutthroat competition in the industry poses a serious challenge."

    Hon Hai, meanwhile, had also notified Sharp of its intention to invest last year. The Japanese firm, however, was leery of the offer, as Hon Hai had also promised investment in 2012 but pulled out suddenly. And so, Sharp was leaning toward the INCJ plan. According to sources close to the situation, in mid-January this year, Sharp President Takahashi met with the top executives of its main creditor banks, Mizuho Bank and the Bank of Tokyo-Mitsubishi UFJ, and obtained their support for Sharp's adoption of the INCJ proposal.

    From there, however, Hon Hai mounted an impressive offensive. It raised the amount of capital it would be pumping into Sharp from the original 200 billion yen or so. The more than 600 billion yen that Gou promised to Sharp management on Jan. 30 was the deciding factor. According to Hon Hai's proposal, it would seek Sharp's rehabilitation by acquiring it.

    "The storyline of how Hon Hai could help Sharp was overwhelmingly more convincing (than that of INCJ)," one executive at a major creditor bank said.

    METI's and INCJ's biggest misjudgment was that they believed Sharp's two main creditor banks would stay on their side. On the contrary, Mizuho Bank asked whether liquid crystal businesses were something that the state should protect. METI had envisioned an industry-wide rebuilding that included Toshiba, Hitachi and Fujitsu. But there were doubts about such government-initiated restructuring, with one top executive at a major electronics company saying, "There's no point in joining an alliance of weaklings."

    In contrast to the INCJ proposal, which presupposes over 300 billion yen in support from financial institutions, the Hon Hai one asks for none. With Hon Hai offering better conditions, the creditor banks said they would not be able to provide its shareholders with a satisfactory explanation if they were to support the INCJ plan, while seeking that Sharp make "a fair decision." By this time, the electronics company's executives -- especially the external board members -- were mostly decided on the Hon Hai plan. What proved decisive was a 100-billion-yen deposit that Hon Hai gave Sharp to ensure that it would not renege on its promises.

    While one senior METI official says, "The only thing banks think about is money," an executive at a financial institution says, "It's arrogant for the government to try to manipulate industry to suit itself."

    A Japanese electronics company -- once one of many taking the world by storm -- is now attempting to make a fresh start under the umbrella of a large and non-Japanese Asian corporation. This has made it abundantly clear that the competitive environment has undergone major changes worldwide. A senior INCJ official says that it is ready to take more action, but top executives at major Japanese electronics companies frown upon government intervention in industry.

    "There is a need to restructure the industry. But it just means that companies with a competitive edge will survive," said one industry CEO.

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