May 25, 2018

Breakingviews: Apple Would Make a Good Backer for Foxconn IPO

by Breakingviews

A small investment could pay big diplomatic dividends for Apple. Foxconn, the Taiwanese contract manufacturer, wants strategic backers for its upcoming $43 billion Shanghai listing. It’s an opportunity for the California company to strengthen its relationship with the iPhone assembler. Beijing also might appreciate the endorsement.

Foxconn boss Terry Gou is carving out a fast-growing subsidiary. Shenzhen-based Foxconn Industrial Internet produces telecom and cloud computing equipment, as well as industrial robots for the likes of Amazon. It is raising capital to help fund those efforts as well as to research new technology related to 5G superfast mobile broadband and the so-called internet of things, connecting a wide variety of devices over a network – the sorts of developments that should interest Apple.

As part of the fast-tracked initial public offering, Foxconn – formally known as Hon Hai Precision Industry – is seeking to place about 30 percent of the $4.3 billion issue privately. That is to ease regulatory concerns about the size of the share sale, which might otherwise add to volatility on a Shanghai Stock Exchange that already can swing wildly. If there were, say, three equally large anchor investors, it would cost Apple, with its $160 billion or so of net cash, only about $430 million.

There might be a long lockup period preventing any share sale and also some technical hurdles for a foreign acquirer to jump. That makes domestic usual suspects more likely candidates. Other countervailing benefits exist, however, for the company led by Tim Cook. For one thing, it would signal a further commitment to Greater China, which accounted for more than a fifth of Apple’s sales last quarter and grew faster than any other region except Japan.

Perhaps more significantly, Apple could put a big stamp of approval on a significant local initiative: bringing innovative companies to Chinese investors. To the same end, Beijing has been easing regulatory impediments to woo its U.S.-listed technology outfits back to mainland exchanges. Having a big brand name behind the country’s biggest IPO in years would be the kind of gesture that might be remembered in Zhongnanhai. As tensions keep mounting between the United States and the People’s Republic, that could make a Foxconn stake just that little bit more valuable.

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