Shares in Japanese consumer electronics makers Sharp Corp and Pioneer Corp fell more than 2 percent on Friday, hit by investor doubts over the effects of their equity and business alliance.
Sharp said on Thursday it would buy about $357 million worth of new shares from Pioneer to take a 14.3 percent stake and work with its loss-making rival in developing DVD players, car electronics and displays.
Pioneer, in turn, will buy 10 million existing Sharp shares, or 0.9 percent of total shares outstanding, for $170 million.
The deal is the latest move by Japan's electronics conglomerates to form alliances or ditch unpromising businesses to try and keep up with deep-pocketed global rivals and respond to increasing shareholder pressure for better returns.
One (negative) factor is the overall market, which is down. But also, there seem to be worries among investors about what these two companies can get in return of their investments, Mizuho Investors Securities analyst Mitsuhiro Osawa said.
The deal fell short of an all-out merger. And if technological cooperation is what they are looking for, they would not even have to buy each other's shares, he said.
Shares in Sharp, the world's third-largest liquid crystal display (LCD) TV maker behind Samsung Electronics Co Ltd and Sony Corp, were down 2.1 percent at 1,918 yen.
Pioneer shares were down 3.3 percent at 1,355 yen by early afternoon after erasing early morning gains, underperforming the Tokyo stock market's electrical machinery index, which fell 1.75 percent.
Despite the initial share price reaction, however, some investors and industry specialists say the pact could prove a step in the right direction.
At this point, shares of the two companies are traded on an initial impression of industry-winner Sharp helping struggling Pioneer, said Hitoshi Yamamoto, president of Commerz International Capital Management (Japan).
But in the long run, I think Sharp will benefit from the alliance with Pioneer.
As part of the alliance, Sharp will supply LCD panels to Pioneer, enabling the world's sixth-largest plasma TV maker to add LCD TVs to its product lineup. While global LCD TV sales are growing rapidly, plasma TV demand is in decline in revenue terms.
The arrangement will also give Sharp a stable customer for its LCD panels when the Osaka-based company is expanding its panel production capacity aggressively.
Sharp, which offers Aquos brand LCD TVs, plans to spend $3.3 billion to build the world's largest LCD plant in Japan by 2010.
Deutsche Securities said in a report on Thursday that the alliance was highly positive and upgraded shares of Sharp to buy from hold.