SHARP Corp. (SHCAY, Financial) witnessed a drop in share value after reports that the company is considering a capital reduction plan, its decision to reduce its capital. The news is surely surprising given that around 99% of capital is expected to be slashed. This is a whopping $834,000 reduction, which is a part of the Osaka-based company's turnaround strategy. This should come as no surprise given that the electronic-manufacturer has suffered from losses for many years. Sharp is also considering preferred share issuance, and may officially reveal this decision on Thursday.
Downsizing capital
The Japanese MNC will cut down on its capital from $1 billion that is 120 billion yen to 100 million yen. Not a very known fact, but 100 million yen is the upper cap for small and mid-sized companies who wish to take the advantages for tax benefits. The slashing of capital can only be done once shareholders approve the decision in the shareholders meeting next month. It seems that Sharp did not have any other choice as Asian competitors are nibbling away Sharp's market share. The liquid crystal panel display unit has by far been dominated by other electronic companies in Asia.
The amount that will be squeezed by this strategic decision will help in nullifying the losses that the electronic company has suffered in the past. It seems that the news did not go down well with investors. Share value dropped 24% by 0325 GMT, thereby reducing Sharp's market capitalization value to $2.77 billion. This was a loss of almost a quarter of its current market value. During the day, shares even went on to fall 31%. Though the news has not been declared officially, it will be done in the coming week, people close to the matter have said. On Thursday, a new business plan will be revealed along with the fiscal-year financial results, Sharp officials have said. It has also been revealed, though by another source, that around five thousand jobs will be cut, and the company will spin off from its low-performing smartphone display business.
Preferred share issuance
Sharp also expects to obtain financial help from the bank lenders. One probable option could be issuing preferred shares with no voting rights instead of debt. Toshihiko Matsuno, a senior strategist at SMBC Friend Securities, voiced his opinions that preferred shares could dilute investors' rights if they were converted to common shares. This strategy could be of little consolation to Sharp's shareholders. Though a number of aspects influence the restructuring plan, shares will surely become the main target. Matsuzawa, an analyst at Daiwa, said that issuance of preference share is obviously a better option as compared to issuance of new ordinary shares or even bankruptcy for that matter. If the company would go for new ordinary share issuance, existing stocks could either be diluted or wiped out, he said.
Road ahead
It is quite evident that Sharp is not performing well. The company may soon shut down around four factories in Japan which manufactures electronic components. The company may also spin off the solar cell division. Sharp has estimated a loss of 30 billion yen for the fiscal year ended 31st march 2015. But the net loss may even touch 100 Billion yen, according to some analysts' estimates.
In-spite of all the losses, Sharp has not gone bankrupt yet, but Sharp may not exist in five year's time, said Mana Nakazo, an analyst at BNP Paribas (BNPQY, Financial). If the Japan-based company could increase its efforts in building a viable strategy and identifies new businesses which could make profit, Sharp might bounce back to a small extent. It's always small steps that help in leading to a great victory. Now all that investors can do is wait for the the company's revelation of its restructuring plan on Thursday, after the market closes.
