A month ago, I wrote about the merger proposal for Japanese video screen maker Sharp Corp (6753) made by Taiwan-based Foxconn (aka Hon Hai Precision).  Foxconn had offered to acquire control of Sharp for roughly US$6 billion, or about twice the price that Japanese government-owned Innovation Corporate Network of Japan (ICNJ) was willing to pay for the chronic money-loser.  Nevertheless, before a public uproar over the traditional Japanese solution of hiding a problem in a government-orchestrated bailout rather than fixing it, it appeared that Sharp would opt for the ICNJ offer.  So much for Abenomics.

Three developments since then:

–it is now clear that neither proposal involved buying Sharp shares from existing shareholders.  Both Foxconn and ICNJ intended to purchase new stock from Sharp itself.  On the positive side, that would mean that Sharp would receive all the funds.  On the negative, existing shareholders–meaning the investing public in Japan–would be severely diluted.

–apparently feeling significant public pressure from the disparity between the two offers, the board of directors–surprisingly, to me–chose Foxconn over the ICNJ!

–yesterday, on the eve of the change of control, Foxconn announced it was suspending its offer.  According to Reuters, this was because in the final, official disclosure of financial documents by Sharp, Foxconn learned the company had US$2.7 billion in liabilities it had not known about previously.  

Sharp says the liabilities were properly disclosed in its financial statements.  I interpret as meaning that, yes, Sharp didn’t bring the subject up in negotiations, despite its importance, but that there was a least an oblique hint in its publicly disclosed financial reports that these liabilities might exist.  It also sounds to me as if Sharp had a higher legal disclosure requirement in the case of takeover, which it fulfilled at the last minute, hoping no one would notice.

My thoughts:

–Welcome to Japan.

–One Reuters report says the liabilities are “contingent” ones, meaning that in some way future events will determine whether Sharp is on the hook for the $2.7 billion.  These might be guarantees for the borrowings of other companies, like suppliers or customers.  They might be warranties, or guarantees of minimum purchases from suppliers, or guarantees that Sharp products in the hands of merchants can be returned for full refunds if not sold.  In any event, however, there are a whole lot of them.  Foxconn’s action implies it believes the contingencies are pretty likely.

–Foxconn says it still wants to go through with the deal, but presumably at a lower price.