General Announcements

Q&A for ASUS and Pegatron – Spin-off and Capital Reduction Plan

2009-12-14

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• Q: How did Pegatron decide the spin-off timeframe and how did it decide 75% shares distributed to the (ASUS') shareholders?
  
  A: From the perspective of companies' operations, we actually wish ASUS could unload the shares of Pegatron even earlier. In the past year, Pegatron devoted itself to adjusting its business operations; however, our customers' concerns about branding-business and ODM business still under ASUS' umbrella (although ODM business is run by Pegatron) remain. The concerns could only be removed by the reduction of ASUS' shareholding in Pegatron. The Spin-off will actually help ASUS to achieve that. After the announcement of the Spin-off plan, the management at Pegatron have received positive responses from quite a few key customers. The management teams in ASUS and Pegatron both intend to further lower down ASUS' shareholding in Pegatron as soon as applicable. However, it would cause the shareholders to bear high tax rates, if ASUS elected to distribute entire Pegatron shares to the shareholders. Therefore, ASUS chose to distribute 75% of Pegatron shares to the shareholders at the first step. The distribution will require ASUS to reduce paid-in capital and other equity accounts, like Capital Surplus and Retained Earnings which is subject to tax implication. In order to minimize the taxable income from this distribution for the shareholders, ASUS plans to reduce its capital by 85% and reduce (distribute) retained earnings by only 9%. Reduction of retained earnings is deemed as distribution of retained earning to shareholders, which is considered taxable income to the shareholders. 9% reduction of retained earning is to help the shareholder to have lower tax exposure. At the same time, ASUS will distribute cash dividends. The expected dividends to be received by the shareholder shall exceed shareholder's tax payable from the Pegatron share distributions. Substracting the tax payable from the cash dividends, the shareholders shall still enjoy positive cash inflow, meaning no cash payout for the shareholders from the distributions.



• Q: Why does ASUS elect to do capital reduction?
  
  A: Because of Pegatron's sizeable net worth, it is difficult to seek financial investors to take up the shares of Pegatron from ASUS. We believe through capital reduction and distribution of Pegatron shares to the shareholders is the fastest and most effective solution. If we adopt M&A approach, there exists valuation mechanism which could potentially underestimate Pegatron's true value and the shareholder will suffer. Therefore we ruleed that approach out.