Why the Sharp Investment Will Poison Intel and Dell

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When rumors began to surface around Thanksgiving that beleaguered tech giants Intel (NASDAQ: INTC) and Dell (NASDAQ: DELL) were planning on making some sharp investments, I got excited. The first thought that entered my head was “finally, these two are beginning to get it.” But then it became clear that the investment was actually going to be in Sharp, the struggling Japanese electronics giant, a move that makes absolutely no sense whatsoever.

What Could They Possibly be Thinking?

Sharp is in desperate need of help, and bankruptcy looms if the company is unable to secure the financial assistance that it needs. Like several of its peers such as Sony, Panasonic and JVC, Sharp has an impressive portfolio of product innovation. However, in that same regard, the company has failed to adapt to new technology.

In other words, customers have moved on and Sharp has struggled for years to get them back. Remarkably, this is the same issue that both Intel and Dell are struggling with here in the U.S. – except their financial situation are not as bad. 

For instance, Sharp is currently on the hook for a net debt total of $10 billion, whereas $2 billion of that total is shareholder equity. Likewise, there is $2.5 billion in convertible debt that is due in less than a year. And then there is another $2 billion worth of liabilities in commercial paper.

The company is stretched thin. Worse yet, Sharp does not bring in enough cash to meet its obligations as evident by the company’s free cash flow problems, which has been eroding over the past several years.

Astute investors want to know where exactly the advantage is that would be gained from an investment in its business. More to the point, what do two struggling American companies want with a foreign operation that is in even worse shape?

Is There a Silver Lining?

At this point it is hard to say. However, the first obvious angle that both Intel and Dell might be looking at is Sharp’s close relationship with Apple (NASDAQ: AAPL) (with glossy eyes). It goes without saying that much of the suffering that Intel and Dell have seen has been the result of Apple’s dominance in mobile devices. They now see an opportunity to escape - except it won't work that way.

Nonetheless, Apple does have an interest in Sharp’s solvency. Apple needs a way to offset its “strained” relationship with Samsung. In other words, Apple needs Sharp to remain a viable supplier of LCD screens in the event that Samsung bails. And there’s a good chance that this will happen. 

In essence, any company that invests in Sharp might envision an Apple “pay day” by way of production contracts. For Dell, this might also present an opportunity to upgrade its existing line of hardware. Likewise, Intel could leverage this relationship to further its interest to enter Apple hardware, which is now dominated by Qualcomm, ARM Holdings and Broadcom.

Bottom Line

While these incentives certainly sound appealing for Dell and Intel, I just don’t think they present enough justification to make this deal. It also might be possible that both companies see some cross-promotional opportunities by this investment, particularly with the Ultrabook line of machines. But to the extent that it will avert the current PC decline which has caused their collapse, that’s not going to happen.

It also seems that Sharp is dangling these carrots in front of prospective candidates. To the company’s credit, it seems that Intel and Dell are ready to bite. I just worry that aside from a misguided strategy, it also seems that Sharp’s poor financial situation is the poison that comes with these carrots.

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple, Dell, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus