Tue, Feb 02, 2016 page14

• Foxconn history suggests Sharp bid a bad idea: Gadfly

  • By Tim Culpan / Bloomberg
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  Foxconn Technology Group (富士康科技集團) founder and chairman Terry Gou (郭台銘) said he is confident he will win the battle to take over Japan’s ailing Sharp Corp. Investors might want him to be wrong.

  The man who disdains Wall Street bankers is himself a poor dealmaker. In the 41 years since Gou founded Foxconn as a maker of plastic TV knobs, he has built the company into a global electronics powerhouse.

  Yet Foxconn has made only four acquisitions of more than US$1 billion, and 90 smaller ones. The biggest was the US$9.9 billion takeover of Chi Mei Optoelectronics Corp (奇美電子), which closed in early 2010. The idea was to combine Foxconn’s Innolux Display Corp (群創光電) with Taiwan’s second-largest flat-panel maker.

  Making that deal, one month after announcing the US$1 billion takeover of a smaller panel maker, TPO Displays Corp (統寶光電), Gou was frank: “Right now in TVs, we do not make any money from panels. We make money from connectors and supply-chain management.”

  The three-in-one merger was supposed to change that business model. It did not.

  In the five years since then, Innolux has lost more money than it has made, and shareholders are 80 percent worse off. While the panel industry overall has slumped, Innolux stands out as the biggest loser among the top four.

  Gou’s trouble with takeovers goes beyond the numbers. When he sat on stage early on a Saturday morning to announce the formation of Chimei Innolux, he called it a merger of equals, with shared management and Chimei Group as the largest shareholder. Within a few years, the Chimei name was dropped, along with much of the management, and those who remained talked of being subsumed in “the Foxconn way.” Cultures clashed and the business lost money.

  Gou should have known better. His takeover of Premier Image Technology Corp (普立爾) three years earlier — his second-largest deal — was supposed to give Foxconn a leg up in the burgeoning digital camera and module business.

  Instead, again in his own words four years later: “I spent too much money to acquire it, then realized my internal knowledge is better than their internal knowledge.”

  Put simply, he overpaid for shoddy technology and now barely ranks in the lucrative market for smartphone cameras.

  Now there is the US$5 billion attempt to take over Sharp. Alarm bells should be ringing already.

  Take, for instance, the fact that Gou did not manage to close the 9.9 percent purchase he attempted four years ago, which led him to say later that he was fooled in his negotiations with Sharp management.

  The problem was that Sharp wanted the money, but it did not want to give Foxconn a hand in management and submit to “the Foxconn way.”

  If the target really does not want you, you would be well advised to think twice.

  As Bernstein analyst Alberto Moel put it in a note last week: “It would involve Hon Hai [鴻海精密] having to restructure an open can of worms at a distance and with no real experience in Sharp’s business or corporate idiosyncrasies.”

  Hon Hai Precision Industry Co is Foxconn’s biggest unit and the vehicle for most of Gou’s deals.

  Then there is the fact that Gou is offering double the value that the market, and rival bidder Innovation Network Corp of Japan (INCJ), put on Sharp.

  To be sure, the INCJ offer is not a like-for-like comparison, because it involves further capital and likely spinoffs. However, if on the face of it nobody else thinks Sharp is worth this much, Gou might need to remember that those who do not learn from history are bound to repeat it.

  This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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