Foxconn’s Sharp Takeover on Hold Due to Undisclosed Liabilities

Sharp’s (TYO: 6753) announcement that it would be acquired by Taiwan’s Foxconn (TPE: 2317) may have been premature. After discovering undisclosed liabilities, Foxconn is putting the deal on hold, fueling doubts that the acquisition, which would have been Japan’s largest takeover by a foreign firm in its technology sector, will come to fruition.

Sharp had announced earlier in the day that it agreed to be acquired by Foxconn, a manufacturing firm that is currently one of Apple’s (AAPL) major suppliers. A separate statement released hours later confirmed that Foxconn would not sign the agreement until terms in “new material information” were clarified. No further details were released.

Sources close to the matter said Sharp had contingent liabilities that surmounted to hundreds of billions of yen. According to the sources, these liabilities would need to be settled before a deal could be finalized.

Both Foxconn and Sharp have declined to comment on the issue.

The delay puts a deal that was five years in the making in jeopardy. Foxconn’s founder had been courting the company for quite some time, and a deal could not be made until Japan opened its tech sector up to foreign investment.

Earlier in the day, Sharp said it would issue roughly $4.4 billion in new shares to Foxconn, giving it a two-thirds stake. Foxconn’s total investment was set to be over 650 billion yen, or $5.8 billion).

If the two companies can agree on a deal, it would solidify Foxconn’s position as the primary contract manufacturer for Apple and allow Sharp to focus on the mass-production of OLED screens by 2018. This is around the time Apple will likely adopt OLED displays for its newest iPhone.

A deal would also allow Foxconn to better compete with its Asian rivals, primarily Samsung Electronics (KS:005930).

Before announcing that the deal was on hold, shares for Sharp tumbled 14% as the dilution of shares appeared to be much larger than anticipated. Foxconn’s shares ended the day 2.6% higher.

In a unanimous vote, Sharp’s board made the decision to accept Foxconn’s offer. The alternative was a rescue by a state-backed investment fund.

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Daniel Simmons