Apple’s Hon Hai Investment Talk: Why Not? 苹果投资入股鸿海：为什么不？

By newsdoug on April 2, 2012

Apple eying Hon Hai stake? I’m going to do something today I don’t usually do and comment on an interesting report that appeared on a Chinese website that has since been removed regarding a potential massive investment by Apple (Nasdaq: AAPL) in Taiwanese electronics giant Hon Hai (Taipei: 2317), one of its biggest iPhone manufacturing partners. The reason for my exception is that the deal sounds extremely intriguing and makes lots of sense in the current climate, even though removal of the article and lack of similar reports in western media make me suspicious of whether anything is really happening. But let’s move past all this discussion and look at the report itself, which said that Apple was preparing to make a massive $9.76 billion investment in Hon Hai, which was going to issue new shares in the form of global depositary receipts (GDRs) to make Apple its second largest shareholder. Hon Hai currently has a market capitalization of about $40 billion, meaning an investment that size, presuming it was new shares, would make Apple the owner of about 20 percent of Hon Hai’s shares. Again, I want to emphasize I have serious doubts about whether such a deal is actually being discussed for the reasons I previously mentioned. But at the same time, I really do believe that such a deal makes lots of sense for both Apple and Hon Hai for many reasons. From a cash standpoint, the investment would represent a minor amount of money for Apple, which has so much cash at this point, around $100 billion to be exact, that it took the unusual step last month of restoring a dividend for shareholders after a 17 year gap, and also said it would buy back another $10 billion worth of its stock. (English article) From a strategic standpoint, it makes perfect sense for Apple to make such a large investment in one of its biggest manufacturing partners, which shows not only its commitment to the health of that partner but also to the efficient and ethical running of its operations. The focus on not only efficiency but also ethical treatment of employees has become an extremely relevant issue over the past year, as Hon Hai’s Foxconn International (HKEx: 2038) unit, which manufactures iPhones for Apple, has come under intense scrutiny during that period for working conditions that some consider harsh, including pressure for its young employees to work lots of overtime and in isolated conditions on production lines to discourage socializing. That issue has become so big that Apple’s Tim Cook made a special trip to a Foxconn factory in the central city of Zhengzhou during his inaugural trip to China last week since taking over as CEO of the company in 2011 shortly before the death of Steve Jobs. (previous post) Last but not least, Hon Hai shares are quite attractively priced right now, down about 34 percent from where they were a year ago on all the negative publicity as well as rising costs, even as the rest of the market has rallied. So, on the whole, even if Apple isn’t considering this deal, I think it should as it makes lots of sense from so many angles, with the potential to benefit both Apple and Hon Hai.

Bottom line: A report citing Apple in talks to make a major investment in manufacturing partner Hon Hai looks like a smart move that Apple should strongly consider, even if the rumor isn’t true.

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