Sharp Corp., which once ruled the electronics home market with its liquid crystal display (LCD) TVs, is seeing its stock price continue to tumble amid persistent business woes, even after announcing it would slash 5,000 jobs on Aug. 2.
The sinking electronics giant can no longer ignore a request by Taiwan's Hon Hai Precision Industry Co. to reconsider a previous offer, under which Hon Hai would acquire a considerable stake in Sharp.
On Aug. 6, Sharp's stock prices dropped more than 5 percent from the previous weekend and closed at 181 yen ($2.30), its lowest closing mark in 38 years. The stock is now selling at less than a third of its price six months ago.
The credit default swap spreads, or the rate of premiums for insurance policies that would cover losses if Sharp were to default on the repayment of its loans, also rose sharply on Aug. 6, indicating a significant loss in Sharp's credit in money markets.
The selling off of Sharp stock isn't stopping partly because its performance in its mainstay TV and LCD operations is worsening, and partly also because the outlook of its capital and business tie-up with Hon Hai, considered a "savior" and a last resort for Sharp, has suddenly turned volatile.
Sharp announced in March that Hon Hai would become its leading shareholder. Hon Hai invested about 66 billion yen in July in a subsidiary that operates Sharp's LCD plant in Sakai, Osaka Prefecture.
Hon Hai was supposed to invest an additional 67 billion yen to acquire a 10-percent stake in Sharp itself.
On Aug. 3, however, Hon Hai said it had agreed with Sharp on a review of the terms of the planned investment in Sharp. Sharp, however, denied any such agreement had taken place.
The contract obliges Hon Hai to purchase Sharp stock at 550 yen per share, but the share prices in the market are now hovering below 200 yen. Hon Hai would incur major losses if it were to purchase Sharp shares according to the contract terms.
Hon Hai has asked for a review of the terms, and Sharp apparently cannot afford to ignore the request.
One stumbling block is that Hon Hai would obtain about a 30-percent stake in Sharp if the Taiwanese company were to invest the prescribed amount to acquire Sharp shares at their current price levels. That would virtually turn Sharp into a Hon Hai group company.
To avoid that outcome, Sharp is hoping to slash the amount of the investment, but Sharp would have to look for other investors to make up the difference.
Sharp has been calling on its main banks, including Mizuho Corporate Bank, for loan increases and other assistance measures. The banks may consider extending additional loans, but likely only on the condition that Sharp takes additional restructuring measures, including further personnel cuts and selling off real estate assets.
REVAMPING LCD OPERATIONS IS KEY TO RECOVERY
Sharp did not only have investment in mind when it decided to link up with Hon Hai. The Japanese company also hoped to have excess stock of its LCD panels purchased by Hon Hai, raise the utilization rate of its mainstay Sakai plant and thereby improve its profitability.
Hon Hai began purchasing LCDs in July, and the plant utilization rate rose to 80-90 percent. That would have plugged the largest drain on Sharp's finances, but in fact, the market environment has worsened beyond levels that anybody had anticipated.
"Our performance just never stops getting worse," Sharp President Takashi Okuda said during a release of financial results on Aug. 2. He revised the net loss projection for fiscal 2012 significantly upward to 250 billion yen.
That includes an operating loss of 105 billion yen in the LCD segment and an operating loss of 17 billion yen in the audiovisual and communication equipment segment, including TVs.
Those figures presuppose that the operations will return to the black in the second half of fiscal 2012. The financial results could turn out even worse if that did not happen.
But Sharp cannot afford to let go of its LCD operations.
In fiscal 2007, the LCD segment and the audiovisual and communication equipment segment accounted, when combined, for nearly 70 percent of the company's total sales and total operating profit. Even now, they continue to account for 60 percent of Sharp's total sales.
Those digital equipment operations, however, are facing tough price wars with foreign rivals.
Sharp plans to cut its fixed costs by around 100 billion yen this fiscal year, with some of that coming from the slashing of about 5,000 jobs. The company also aims to expand business into domains where it can draw on its technological excellence. It plans, for example, to turn its Kameyama plant in Mie Prefecture into a factory for LCD panels for smartphones and tablet computers.
None of these measures, however, could serve as the catalyst for business recovery at a time when Sharp is hobbled with 1.25 trillion yen in liabilities with interest.
If Sharp fails to revamp its LCD operations, a significant hike in Hon Hai's shareholding ratio, coveted by the Taiwanese company, may remain as its only viable option.
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