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What Does Foxconn's Potential $27 Billion Purchase of Toshiba's Chip Business Mean?

Benjamin Rains

Reports of a potential $27 billion sale of Toshiba Corporation’s TOSYY computer chip business to Foxconn Technology Co. sent Toshiba’s stock price up nearly 7% on Monday. The massive sale would further bolster Foxconn’s growing business, but what might it mean for Toshiba and the state of business in Japan?

Bloomberg reported Foxconn’s initial interest in Toshiba’s extremely important semiconductor business late Sunday night. Since then, Foxconn’s stock has remained relatively flat, up 0.55% to $91.50 per share on Monday. Toshiba’s stock closed up 5.79% to $12.42 per share.

After purchasing Japanese electronics giant Sharp Corp. SHCAY for $3.8 billion in August 2016 by substantially outbidding the rest of the market, the Taiwanese company hopes to do the same with Toshiba.Foxconn’s $27 billion offer for Toshiba’s computer chip business came in well over the next highest bidder’s $18 billion offer.

The potential Toshiba move could position the world’s largest electronics contract manufacturer and an assembler of Apple Inc. AAPL products to become a major player in the vastly expanding semiconductor market. Foxconn doesn’t have a substantial flash memory business so there likely wouldn’t be antitrust concerns that could prevent the deal.

Aside from a massive cash grab, what does a potential $27 billion deal to sell off a major asset mean for Toshiba?

Implications for Toshiba

Toshiba is reportedly the second largest NAND flash memory maker by market share in the world, behind only Samsung Electronics Co SSNLF. The company’s semiconductor sector is one of Toshiba’s most important businesses. So why would the electronics giant sell off such an important asset at a time when the market for computer chips is only growing?

The answer is simple: Toshiba needs the cash.

Toshiba’s 2015 accounting scandal created billions of dollars in losses after the company was caught overstating nearly six years worth of profits. The company is also trying to make up for a recent $6.3 billion write-down from its U.S. nuclear unit Westinghouse.

The move to sell its memory-chip business comes after Toshiba sold its medical-scanner and home-appliance businesses last year.

Toshiba’s computer chips are vital components for both the computer and smartphone industry, including the iPhone 7’s flash memory chip. Today, computer chips have become extremely valuable parts of the automotive, smart-appliances, and a laundry list of other industries.

It seems like an odd time to sell off a business that Toshiba excels at, especially at a time when the industry is booming and is poised to continue to do so for years to come. However, after trading at roughly $24 per share in December, Toshiba’s stock price has fallen by nearly 50%. This means the pressure is on for Toshiba to make a move now.

The move to sell its valuable computer chip business is a massive short-term play to appease stockholders.

Potential For Japanese Intervention

Japanese Prime Minister Shinz?? Abe and other government officials are reportedly wary of seeing Toshiba’s vitally important memory chip business sold to any mainland Chinese bidder based on potential security threats. The Japanese government hopes a fellow Japanese company will purchase the struggling technology giant.

However, Toshiba recently said the most important factor in selecting a buyer would be based strictly on the dollar value of the offer and the buyer’s ability to close the deal quickly.

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