Corporate Governance in Japan: Sharp Elbows

New twists in the battle for control of an ailing electronics firm.
Economist StaffFebruary 11, 2016

It is surely a promising sign for Terry Gou, the boss of Foxconn, that Japan’s largest business newspaper, the Nikkei, is reporting unflatteringly on his efforts to buy Sharp, a near-bankrupt electronics firm. At first the Innovation Network Corporation of Japan (INCJ), a government-backed fund, had seemed certain to snap up the company, and the Nikkei said little. But now the paper is calling Gou a domineering, wilful “warlord of business” with close ties to China who it says has antagonized Sharp’s management with its tactics. So he must be getting somewhere.

Gou scored a coup on February 5 when he appeared to secure Sharp’s agreement to favor Foxconn’s bid of ¥660 billion ($5.6 billion) for the firm, rather than that of the INCJ, which is offering about half as much. Gou says the two firms are set to strike a deal this month. If so, it would be one of the biggest foreign takeovers of a Japanese firm. Sharp says it is still talking to the INCJ.

Many foreign buyers have failed before. Japan Inc effectively slammed the door shut to overseas takeovers in 2007 when, backed by the Ministry of Economy, Trade and Industry (METI), Bull-Dog Sauce, a venerated condiment brand, cooked up a poison-pill defense to rebuff the advances of Steel Partners, an American hedge fund. Four years ago the INCJ, which has ¥2 trillion to invest, prevailed over KKR, an American private-equity fund, in buying Renesas Electronics, a chipmaker.

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An all-Japanese deal for Sharp would be awkward for Shinzo Abe, the prime minister, given his flagship policy of seeking to revive the economy via reforms. One element of his program is to attract more foreign investment. Abe’s advisers may even have had a say in Sharp’s abrupt change in attitude to Foxconn.

Last year Abe brought in a corporate-governance code that emphasizes shareholder rights and the duty of outside board directors to promote them. Sharp’s external directors are said to have feared being sued by shareholders if they opted for the INCJ’s much lower bid. It was also difficult for Sharp’s two main banks, Mizuho Financial Group and Bank of Tokyo-Mitsubishi UFJ, to shun Foxconn’s offer to assume some of Sharp’s debts.

Losing Sharp to Foxconn would be a singular humiliation for the INCJ and METI. The INCJ had aimed to merge Sharp’s LCD-panel business with that of Japan Display, a firm whose creation it oversaw in 2012 and which is now Japan’s main maker of smartphone screens. Another scheme was to meld Sharp’s domestic-appliances business with those of other Japanese firms, including Toshiba, another troubled industrial group.

The INCJ’s leaders are incensed at, and baffled by, the way the Taiwanese firm inched ahead. They argue that their plan is far tougher on Sharp and its banks. (As well as relieving the banks of much of Sharp’s debts, Gou has hinted that he will keep the firm’s management and says he will not fire employees under 40.)

“The biggest difference between the two bids is that we are asking Sharp’s Japanese main banks to cancel some of the firm’s debts and take a loss on them, since they are responsible for the company’s difficulty,” says Tetsuya Hamabe, chief strategy officer of the INCJ. That argument should go down well with reformers, who criticize the banks for propping up failing firms, if not with the banks’ own shareholders.

The INCJ may fight to the last, but a deal with Foxconn would show that Japan is changing its attitude to outsiders. One reason it may come off is that as a failing firm, Sharp matters less for national pride. A foreign takeover of a more successful firm would be different. If, say, Tata Steel of India were allowed to buy Nippon Steel & Sumitomo Metal Corporation, imagines a government adviser, that would really signal that Japan is open to foreign buyers.

©The Economist Newspaper Limited, London (February 13, 2016)

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