Can Intel and Qualcomm pull Sharp from the mire?

January 2013 | FEATURE | CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Beleaguered electronics manufacturer Sharp Corp was given a boost in mid-November, when it was widely reported that telecommunications firm Qualcomm Inc., and chip manufacturer Intel Corp are in talks with a view to jointly investing $378m in the troubled company. Although few details of the deal are currently known, Sharp, having endured a miserable few years, will be thrown a lifeline if investment terms are agreed.

In early November, Sharp was forced to revise its net loss forecast for the year, doubling losses to $5.6bn including $1.1bn the firm had allocated for restructuring. These figures are a far cry from Sharp’s golden days of the early 2000s. Between 2002 and 2007 the company reported consecutive record-breaking profits, and earnings during that period rose 150 percent. Today, Sharp is the world’s worst performing major stock and last year saw 75 percent of its market value wiped away. This plunge is attributable to falling sales across the board, most notably in its television unit. Such has been the drop off in television sales the company has decided to change direction; it will now focus on the smaller tablet displays that it has been supplying to Apple Inc. It is the potential of these displays that attracted the attention of Intel.

Shares in Sharp rose 11 percent on news of the recent Qualcomm/Intel talks. Despite this, the firm’s long-term outlook looks perilous. Sharp is currently relying on loans of ¥360bn from the Bank of Tokyo-Mitsubishi UFJ and Mizuho Corporate bank, in order to sustain itself until March 2014. The firm is also in the process of negotiating an $863m investment by Taiwanese firm FoxConn Technology Group, which would see the firm take a 9.9 percent stake in Sharp. The deadline for these talks is currently set for March 2013, though an anonymous Sharp executive has indicated that they could continue beyond that point. With ¥20bn of convertible bonds due to mature in 2013 there is a strong possibility that Sharp will turn to the government for a bailout, although any possible state intervention would require Sharp to have a solid plan in place for turning its fortunes around. To add to the misery, ratings agencies Standards & Poor’s, Moody’s and Fitch have all downgraded the company’s rating to ‘junk’, reinforcing Sharp’s negative prospects for recovery in the near future. Fitch, in a 2 November statement, reported that it “does not foresee any meaningful operational turnaround in the company’s core business over the short-to-medium-term”.

Although the situation at Sharp appears dire, it is important not to view this in isolation; the predicament that the company currently finds itself in is indicative of a wider crisis among Japanese electronics companies. Sharp’s long term rivals Panasonic and Sony have also endured dwindling sales and crippling losses in recent years. Sony reported net losses of $194m for Q3 2012. The firm has been downgraded six levels by Moody’s and has made four consecutive annual losses.

Panasonic, meanwhile, has forecast that it will report losses of $10bn this financial year, making a total accumulative loss of $19bn over the last two years. The firm announced another round of job losses in mid November. Once completed, the company will have removed nearly 47,000 staff members in the last 12 months, or 13 percent of its workforce. In light of these staff cuts and the enormous level of losses recorded in the last two years, the company will be undergoing a vast program of restructuring which will cost $5.5bn.

The head of Panasonic’s display business, Yoshio Ito, told Reuters that his is one of the only units within the company projected to deliver a profit for the period from January to March. As the company follows Sharp out of the TV market it will continue to focus its attention on tablet panels. Indeed, Mr Ito has suggested that 60 percent of his display unit’s sales in the next six months will be small LCD panels. These displays are much cheaper to manufacture than the larger plasma television panels that the company had previously focused on.

The strength of the yen has greatly affected sales of Japanese electronic goods abroad. Accordingly Sony, Sharp and Panasonic have all found themselves undercut, particularly in the television market, by cheaper, more innovative products from South Korea and the surrounding Asian market. Samsung Electronics in particular has benefitted enormously from the decline of its Japanese rivals, and is firmly entrenched as the world’s biggest technology company by revenue.

The fact that Sharp is just one among a number of companies facing tough times will bring it little comfort. However, the firm will be buoyed if recent investor interest brings positive returns. While an injection of cash will not solve the firm’s problems, it may hand it the lifeline it needs in the short term.

Richard Summerfield