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Business Trends

Japanese Apple supplier hastens merger to offset poor iPhone sales

Alps Electric still faces opposition from activist investor

Expectation of a lower production of iPhone X is hitting Apple suppliers globally, including Alps Electric in Japan. (Photo by Maho Obata)

TOKYO -- Apple supplier Alps Electric says it is bringing forward its merger with subsidiary Alpine Electronics to capture synergies but the truth may be that it wants to offset a hit from poor iPhone X sales.

Alps, which provides image stabilization parts for iPhones, may also be seeking to fend off pressure from Hong Kong-based activist investor Oasis Management. The fund holds a near 10% stake in Alpine, which makes navigation systems and other electronic devices for vehicles, and is balking at the plan.

Alps announced on Feb. 27 that it will carry out the merger in January 2019 instead of April as originally planned.

Alps President Toshihiro told Nikkei the next day: "We want to raise the share of car devices in our overall profits to 50% as early as possible, from the current 40%."

Apple has sharply cut its production targets for the latest, most expensive, iPhone model in response to disappointing sales, sending shockwaves through the electronic parts industry.

iPhone X production for the first three months of 2018 is now expected to be only half of the original target. Some parts suppliers are bracing for even worse.

One of the key features of the iPhone X is the dual-camera feature that has enhanced picture quality. The feature has been hugely popular and Alps has seen strong growth in the sales of its parts for image stabilization.

But sluggish sales of the iPhone X and Samsung Electronics' new model have made it clear that such new features no longer boost smartphone sales, said Kuriyama.

Alps is set to report a 60% spike in its group operating profit to a record 71 billion yen ($668 million) for the year through March, thanks mainly to brisk sales of smartphone parts.

But Kuriyama is skeptical about similar growth next year, a far less optimistic view than the bullish outlook for smartphone sales he voiced last autumn before the launch of iPhone X.

Weak iPhone sales has led to a sell-off of Alps shares. The company's shares fell 13% from Jan. 30 to March 5, marking a much sharper decline than the 9% drop posted by the "electric appliance" category of the Nikkei stock average over the same period.

When Alps' decision to hasten its merger with Alpine was reported on Feb. 27, Alps shares rose 7%. Alps has not changed the stock-swap arrangement for the merger -- each share of Alpine will be exchanged for 0.68 share of Alps under the terms.

With this decision, Alps and Alpine have effectively rebuffed Oasis' argument that the deal was unfair to Alpine stockholders and should be reconsidered. The share price movement on Feb. 27 also showed that investors liked the prospect of the merger.

It is unlikely, however, that Oasis will surrender without a fight. Seth Fischer, chief investment officer of the fund, told Nikkei: "It is unfortunate that Alps and Alpine continue down the road of poor corporate governance. The most recent announcement further strengthens our case."

He added: "We will pursue all of our legal rights and options to achieve good governance at Alpine and a fair deal for all Alpine shareholders."

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