I understand that rumors don't necessarily have to make sense, particularly when we're talking about the after-Thanksgiving dead zone of market news. So instead of guessing as to just how much Apple (Nasdaq:AAPL) is going to trounce everybody this year, some people are instead speculating as to which American tech companies might come in to rescue struggling Japanese electronics company, Sharp (OTC:SHCAY).

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Sharp Is Dulling Quickly
A full retelling of Sharp's problems would be beyond the scope of this article, but suffice it to say that Sharp has gotten itself into serious trouble - as in "might go bankrupt if something doesn't happen" trouble.

Like many other Japanese consumer electronics giants, Sharp has a legacy of impressive product innovation, but has struggled to evolve with the times. Sharp is active in markets like notebook PCs, smartphones and printers/copiers, but has struggled to get anywhere against the likes of Lenovo (OTC:LNVGY), Apple, Samsung or Hewlett-Packard (NYSE:HPQ), particularly in North American markets. At the same time, markets where Sharp arguably still has leadership positions, including LCD televisions and solar panels, have gotten crushed in recent years.

All in all, the squeeze is on for Sharp. About $2.5 billion in convertible debt securities (and another $2 billion in commercial paper) is coming due within a year or so (September 2013), out of a total net debt load of $10 billion and against only about $2 billion of shareholder's equity. Free cash flow has been negative four of the last five years and is almost certain to be negative again for this fiscal year.

Looking For Investors
With Sharp's credit rating already junk, the company is looking to equity infusions from other tech companies to fill the gap and is apparently trying to offer preferred access to some interesting technology as an inducement. Unfortunately, this may not be enough.

Sharp has been trying to secure an equity investment from Hon Hai (OTC:HNHPF), aka Foxconn, a major assembler of Apple products, for some time, but Hon Hai has reportedly been reluctant to commit, absent some pretty serious concessions. That has supposedly led Sharp to approach American companies Intel (Nasdaq:INTC), Dell (Nasdaq:DELL) and Qualcomm (Nasdaq:QCOM) for investments, with a targeted amount of $250 million or so from both Intel and Dell (and less from Qualcomm).

The carrot Sharp still has is its IZGO (indium gallium zinc oxide) LCD technology. IZGO promises less power consumption, sharper resolution and more accurate/sensitive touchscreens, but manufacturing yields are low at present and Sharp is the only company known to be actively working with the technology. Nevertheless, it sounds like Sharp is trying to use some sort of privileged/preferred access to this technology as an inducement to invest.

OK, But Why?
While $250 million is not much money for Intel or Dell (Intel invested/committed over $4 billion to ASML (Nasdaq:ASML), and even a $1 billion investment would be pretty easy to do), I'm not sure I understand why either company would do it or be interested in the offer.

I realize that Intel wants to promote ultrabooks and the IZGO technology is good for ultrabooks, but Intel doesn't make ultrabooks, and I'm not sure the existence/spread of IZGO-enabled ultrabooks is going to reverse the smartphone/tablet pressures on Intel. While having access to IZGO technology would be a clearer win for Dell (since they actually make devices that use LCD screens), I don't think it would really accomplish much more for Dell than to slow the pace of the decline of its PC/notebook business.

Honestly, I'm surprised the rumors aren't revolving more around Apple or Lenovo at this point. Apple uses Sharp displays in its products, and IZGO technology could be a good differentiating factor for future products (assuming Sharp can improve the yield enough to support Apple's needs). With Lenovo, they're one of the few companies actually doing pretty well with notebooks, they have ample cash, and the perk of offering IZGO technology could be a selling point for not only the notebook business, but also its budding smartphone and tablet operations as well.

The Bottom Line
If someone can explain what Intel or Dell would stand to gain from an investment in Sharp, I'd love to hear it. In the meantime, I have to say that this rumor doesn't make much sense to me. Sharp clearly needs help, and that help almost certainly has to be in the form of equity investment from another tech company. But it would just seem that companies like Apple, Lenovo, or Samsung would all be more logical partners than Intel or Dell. So, I end with the same question that I started with: what problem at Intel or Dell would an investment in Sharp help to solve?

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.



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Tickers in this Article: DELL, INTC, SHCAY, AAPL

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