The stock price of Sharp Corporation (TYO: 6753) declined more than 11% to ¥132 per share in Tokyo on Friday, February 26. The decline was primarily due to the decision of Foxconn Technology (TPE: 2354) to delay its takeover deal with the struggling Japanese company.
On Thursday, Sharp announced its plans to sell 3,281,950, 697 new shares at ¥118 each to Foxconn and its affiliates. The deal would make the Chinese company a majority shareholder in Sharp.
Fxconn needs to clarify new material information from Sharp
Hours after Sharp’s announcement, Foxconn decided not to sign the final deal citing the reason that it needs to clarify some “new material information” from Sharp.
The Chinese company learned that Sharp’s contingent liabilities could be more than ¥300 billion under certain circumstances, which prompted Foxconn CEO Terry Gou to put the final agreement on hold, according to Bloomberg based on information from people familiar with the situation.
In a note to investors, Atu Goyal, an analyst at Jefferies commented, “That puts the entire deal in jeopardy. This is especially so given the dramatic back and forth that happened between Sharp and Foxconn in 2012, when Foxconn agreed to acquire a stake in Sharp but then later walked away.”
Sharp disclosed its contingent liabilities appropriately
According to Sharp, its contingent liabilities have been disclosed appropriately in its quarterly report and securities report based on accounting rules, and no further disclosure is required.
Alberto Moel, an analyst at Sanford C. Bernstein & Co., commented, “It’s odd that after chasing a company for four years you wouldn’t do your due diligence and find out about off-balance sheet contingent liabilities far ahead of striking a final agreement.”
Hideki Yasuda, an analyst at the Ace Research Institute in Tokyo, said, “There is no obligation under Japanese accounting rules to disclose contingent liabilities. The fact that Sharp didn’t have to set aside money for this, suggests that the probability is low and more of a latent risk.”
Sharp CEO Kozo Takahashi and Foxconn CEO Terry Gou are planning to meet over the weekend to discuss the issue.
In a statement, Foxconn said, both parties are in discussions on the matter “with the aim of reaching a comprehensive understanding and resolution of the situation. We hope to reach a satisfactory agreement as soon as possible.”