By Makiko Yamazaki and J.R. Wu
TOKYO/TAIPEI (Reuters) - Taiwan's Foxconn agreed to acquire Japan's Sharp Corp (T:6753) at a big discount to its original offer, capping a month of wrangling that sowed more doubt over whether the two companies can work well together and fend off fierce competition from rivals.
Foxconn, formally known as Hon Hai Precision Industry Co (TW:2317), will pay about $3.5 billion (2.43 billion pounds) for a two-thirds stake, cutting its initial offer by nearly $900 million following the emergence of previously undisclosed liabilities at Sharp.
The deal marks the largest acquisition by a foreign company in Japan's insular tech industry and the end of independence for a 100-year-old company that started out making belt buckles and mechanical pencils.
It also gives the world's top electronics contract manufacturer control of Sharp's advanced screen technology which it does not have, and helps strengthen its pricing power with major client Apple Inc (O:AAPL).
Under the revised terms, Foxconn will pay 88 yen per Sharp share, the companies said in a statement, a 35 percent discount to Wednesday's close and likely reflecting in part Chinese obsession with the lucky number eight.
Foxconn has also agreed to buy all 200 billion yen (1 billion pounds) worth of preferred shares owned by Sharp's two main creditor banks, a source familiar with the matter said on Wednesday.
It also has the option of increasing its stake in Sharp next year.
The firms had been on the verge of finalising terms last month when contingent liabilities at Sharp were suddenly revealed, causing Foxconn to hit the pause button on the deal.
That revived ill will from four years ago, when Foxconn agreed to take a stake in Sharp as part of a broader partnership. Sharp then warned of losses and Foxconn walked away as shares in the Japanese firm sank.
Analysts said that even without the history of distrust, there was little assurance the combination will be able to deflect pricing pressure in LCDs or beat rivals in OLED, a new screen technology which Apple is expected to adopt for its iPhones by 2018.
"If you are talking about two years, it will be difficult. Three years, there is potential. Five years, then definitely,” said Kylie Huang, analyst with Daiwa-Cathay Capital Markets in Taipei.
She added that Samsung (LON:0593xq) Electronics' (KS:005930) display unit and LG Display (KS:034220) will for some time likely remain the preferred choice for OLED or organic light-emitting diode screens which are thinner, lighter and more flexible than other displays.
TECH SECTOR DECLINE
Shares in Sharp rose 4 percent on Wednesday ahead of the announcement. Foxconn shares will resume trade on Thursday after being suspended for the day.
Analysts also said Foxconn, which reported record net profit for last year, was taking on a significant financial risk, even though it had driven down the price of its offer.
Highlighting Sharp's dire finances, the ailing display maker estimated an operating loss of around 170 billion yen for the year through Thursday in contrast to its earlier profit forecast of 10 billion yen.
Sharp and other Japanese electronics firms have struggled against more nimble Asian rivals, with brands that were once synonymous with cutting-edge technology, such as Sony Corp (T:6758), losing their cachet among global consumers.
Industry analysts trace Sharp's decline back to a decade ago, when the company began spending hundreds of billions of yen to expand LCD manufacturing facilities. It then failed to innovate enough, lost ground to LCD rivals and was unable to engineer a turnaround despite two bank-led bailouts since 2012.
The Yomiuri newspaper reported on Wednesday that Foxconn was planning to overhaul Sharp's management including replacing its CEO.
Sharp has said Foxconn is set to pick a majority of its board. But investors had expected most of management to remain in place for some time. Sources said earlier this year that Foxconn Chief Executive Terry Gou had offered to keep most of top management in place, and to not fire employees.
Foxconn executives in Taipei declined to comment on plans for Sharp CEO Kozo Takahashi, saying more details would be available at a signing event and news conference on Saturday.