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Sharp shows Japan Inc may be more open to foreign interest
[TOKYO] If Sharp Corp's rescue plans are anything to go by, Japan's insular technology sector is finally opening up to foreign investors, spurred by a shift in political thinking and a drive for improved corporate governance.
Battered by losses in display panels even after two bank bailouts, Sharp has opted for Taiwan's Foxconn as its preferred suitor, paving the way for the biggest foreign takeover of a Japanese tech company - at around US$5.6 billion.
Japanese policymakers, especially bureaucrats at the Ministry of Economy, Trade and Industry which supervises the Innovation Network Corp of Japan (INCJ), initially hoped the fund would buy Sharp and broker multiple mergers among weaker domestic tech companies, said people with knowledge of the matter.
But, over time, those close to Prime Minister Shinzo Abe set aside concerns about Sharp's technology falling under foreign ownership, and warmed to the idea that a Foxconn deal could help Japan boost foreign direct investment, political sources said.
Abe has said he wants to double Japan's inbound foreign direct investment to 35 trillion yen (US$300 billion) by 2020.
A person close to Abe said Nissan Motor Co's turnaround following a 1999 rescue by French automaker Renault was raised as a positive example. "Nissan's corporate culture may have changed, but its performance didn't deteriorate after that deal," the person said, also citing the "Wimbledon Effect", a mixed economy/tennis analogy highlighting Britain's success in attracting foreign talent while producing few of its own champions. "Opening doors the way the UK did is one way of bolstering an economy," the person said.
Japan's push to attract foreign investment included a corporate governance code to encourage board members to be held accountable to shareholders. Japanese firms have long been criticised for neglecting their stockholders.
That focus played a part in persuading Sharp's board, which may otherwise have sought to please trade ministry officials, to opt for the higher, and foreign, offer. "We finally saw a situation in which Sharp realised it needs to be accountable to shareholders, and would need to take offers into serious consideration even from overseas," said a mergers and acquisitions banker.
Singapore-based activist fund, Effissimo Capital Management, urged Sharp last month to explain clearly to shareholders how it would decide between the offers from Foxconn, formally known as Hon Hai Precision Industry, and the INCJ, then the frontrunner.
The vote by Sharp's board on Thursday to go with the Foxconn talks spurred a 29 percent jump in Sharp shares over two days. "Sharp's decision to choose Hon Hai over a state-backed fund sent a message to foreign investors that it left the decision to the market," said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management. "The move can boost investor confidence ... foreign investors may increasingly feel it's worth investing in the Japanese market."
There will still, though, be parts of Japan Inc that are off-limits to foreign buyers - including some telecommunications technology and that related to possible use by military intelligence, such as sensors.
But sectors such as household appliances, struggling against cheaper Asian rivals, are likely to attract more foreign interest.
The INCJ had been expecting to broker a deal between Sharp's household appliances business and that of Toshiba Corp, which was hit by an accounting scandal last year.
Toshiba CEO Masashi Muromachi said he hadn't entirely given up on a deal with Sharp, but remains open-minded. "If that doesn't pan out, a sale to a foreign manufacturer is also an option," he told reporters on Thursday.