Tom Callinan
There have been numerous commentators providing opinions as to Sharp’s future in the copier business. An article by Nikkei suggested that Kyocera was in discussions to buy Sharp’s copier business. Sharp US has stated that the article is not accurate and that Sharp is not currently in discussions to sell the copier division. Commentators have focused on the fact that the copier business is one of Sharp’s more profitable businesses. That is the correct focus but I think the commentators arrived at the wrong conclusion. Since the copier division is, evidently, one of Sharp’s most profitable it is also one of the most attractive to a buyer. Let’s be clear: I am not stating that Sharp will sell their copier division and or that if they did it would disruptive to the dealer community. I simply have a different opinion based on the fact that the copier division is profitable from those that have been published so far.
Let’s think about it this way. You own 10 ounces of gold and you believe the price of gold will rise significantly over the next year. Your gold is worth approximately $16,000 and you believe if you hold it for another year it will be worth $24,000. Unfortunately, due to an illness of a loved one that resulted in extraordinary medical bills, you’ve fallen behind on your mortgage and car payment, putting you $14,000 in arrears. Your mortgage holder is within days of foreclosing on your home and you have to park your car in a different location each night as the repo-man is stalking your home and work. If you didn’t have a house your kids would be in the street, possibly thrown out of their local school since you aren’t a resident, and you have no idea where you’d live. Without a car you couldn’t get to work. What do you do? You sell your gold and after paying the taxes you catch up on your mortgage and car payments, right? It would be irresponsible to be concerned with future gains when there is so much to lose in the present.
Or let’s say you’re a large financial institution that was bundling really bad mortgages into exotic debt instruments with acronyms like CDO, CDO squared and CMO. One day reality hits and CDOs and CMOs begin to melt like snow in a Florida summer, but you, unfortunately, have hundreds of billions of dollars of these debt instruments warehoused to sell and nobody wants to buy. Your equity is being decimated as you mark to market the debt instruments you had created to sell, that nobody now wants. You need cash, and fast, to survive so you end up selling your brokerage business, the most consistent and profitable business you own, simply because selling it produces the most cash, hence allowing you to live another day and try to build a new future. Sound plausible?
Sharp, like any company in financial stress, needs to worry about survival and not some small drip of future earnings. I categorize earnings as small simply because I have to believe that copiers represent less than 5% of Sharp’s revenue. Let’s make some wild assumptions and assume that Sharp realizes 12% operating income from copiers and copiers represent 5% of Sharp’s revenue. That would equate to a 0.6% difference to Sharp’s bottom line. Let’s assume Sharp has a loss of 10% of revenue without copier and a loss of 9.4% of revenue with copiers. Does that matter to you as an investor?
Now let’s say that Sharp has $4.5 billion in short term notes due and they don’t have the cash to pay those notes and continue operations, nor can they roll the notes over given their financial situation [A Wall Street Journal (WSJ) article of August 22 titled “Sharp Recue Needs More Precision” states that Sharp has $4.5B in commercial paper rolling over in the next month and has $16B in debt]. The Sharp executive team looks through their business portfolio and realizes that they can sell the copier division for $1 billion, a nice chunk of the amount they need to pay down their immediate debt. They sell the business because they are more concerned with survival then they are with earning money next year; there might not be a next year. This is normal business with a company in distress: They sell what they can sell.
I am not wishing Sharp ill will nor am I predicting that Sharp will sell their copier division. I am simply stating that I disagree with the position that Sharp will not sell their copier division because it is profitable.
If Sharp were to sell their copier division let’s look at who might buy it on a purely speculative basis. In my opinion the two most logical acquirers are Kyocera and Toshiba. Clearly both of these companies are Japanese, and given what I know about Japanese mergers it would be far easier for a Japanese company to buy this division. Both Kyocera and Toshiba could benefit from Sharp’s production equipment. Assuming they are able to retain Sharp’s US distribution, it would catapult either company into a “tier 1” provider. That US qualification is important because all companies mentioned in this opinion are global and I only focus on the US market so I do not know their market share positions globally.
Samsung and HP are two other candidates to acquire Sharp’s copier division. Both would have the significant disadvantage of not being Japanese companies. HP would be further handicapped by their poor performance, suspect recent acquisitions, and the fact that they’ve relegated their printer division to the “cash cow” sector in the Boston Consulting Chart. Sharp’s line of products would give HP the ability to compete in all aspects of their enterprise MPS initiative, but given the cloud over HP today it also may result in a significant hit to their stock price since it could be viewed as a reversal of their most recent strategy.
Samsung has a history of being successful in markets they enter and they are firmly in the printer market. At least in the US, they have a well-known and respected leader; that’s not to say they don’t have strong leadership in other business units around the world I simply have no visibility into other markets. If Samsung were to immediately gain Sharp’s dealer base they would quickly become a major player in the US.
I don’t see any benefit to Konica Minolta, Canon, or Ricoh buying Sharp as all three already have production products. Ricoh is further hampered by their long and painful integration of the IKON acquisition.
In each of the above logical, yet speculative, situations the impact on the US dealer market is minimal. Let’s say Toshiba buys Sharp and you are dual line dealer with both Toshiba and Sharp: You might seek another product line to maintain your dual line status, although I would initially take a wait and see attitude. But excluding the situation where you only represent the acquired and the acquirer, there will be as much disruption as there was in 1998 when Kyocera bought Mita, none.
Then again maybe Sharp will jettison all of their other business units and buy one of the aforementioned competitors? Unless you gave me Powerball odds I wouldn’t put money on that option but it is certainly an option; as is simply doing nothing with the copier division.
The aforementioned WSJ article from August, 22 goes on to say “Hon Hai will want to hold out for the best possible deal it can or even wait to scoop up the pieces if Sharp can’t pull out of its nose dive.” Hon Hai is a Korean company that agreed to buy 9.9% of Sharp before Sharp announced more significant losses than originally disclosed, cratering their stock even further. The underline was added by me for emphasis but the characterization is all WSJ. Back to the article “Meanwhile, Sharp’s banks are at the door” and continues “the cost of default protection on its debt has tripled to Greek levels since July.” Default protection is insurance on debt and as we all know Greece has been on the brink of insolvency for about a year. Sharp is clearly in dire financial straits; to my point—they will do whatever it takes to stay in business. The last sentence of the article puts a point on it, to use a pun (Sharp started as a pencil company) “The vultures are surely sharpening their pencils.”
Sharp’s been around 100 years; I hope they are able to address their financial issues and have an opportunity to celebrate 200 years in business. To achieve that goal I am sure they are considering all options. We will have to wait to see the outcome. If I were a Sharp dealer I wouldn’t spend a second concerned with the outcome because regardless of what happens I doubt it will have any material effect on your business.
