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Aggressive deals taking electronics major beyond cash cow smartphones

One of TDK's two new factory buildings, which are currently under construction and scheduled to be completed this summer, is shown in this illustration.

TOKYO -- With the stronger yen and the weakening global economy, Japan Inc.'s earning power is in jeopardy. TDK is one of the few Japanese companies that are aiming to log their biggest profits ever in fiscal 2016 through March next year.

     As a result of its aggressive mergers and acquisitions, the major electronic component company will likely see a spike in its group operating profit for fiscal 2016. But the company is now painting a picture of success for fiscal 2020. By transforming its businesses through M&As, TDK has begun developing new revenue sources, as the smartphone market is getting saturated.

     Asked about slowing demand for smartphones, TDK President and CEO Takehiro Kamigama said the trend has already been factored into the company's plans.

     Many other electronic parts makers have downgraded their forecasts for the current fiscal year ending March 2016 due to production cuts for U.S. technology giant Apple's iPhones. But TDK did not change its net profit forecast of 65 billion yen ($570 million), up 31% on the year. Actually, TDK's sales of its components for Chinese and South Korean manufacturers are on the rise.

     This is not the first time for TDK to adjust its production of components for smartphones. It happened again and again. To diversify risk, Kamigama puts greater importance in maintaining 30% market share. Increasing supply only for a specific maker can easily deal a heavy blow to the supplier's earnings. In the long run, TDK needs to become less dependent on the smartphone market.

Moving on

Recently, TDK has been making buyout and venture deals -- so many it's almost a monthly routine.

     Last November, TDK announced a buyout of disk drive component maker Hutchinson Technology of the U.S.

     The next month, the company announced that it is acquiring Micronas Semiconductor Holding, a Swiss manufacturer of sensor components for automotive and industrial electronics.

     On Jan. 13, TDK said it has agreed with chipmaking giant Qualcomm of the U.S. to establish a joint venture in Singapore. The joint venture will be owned 49% by TDK and 51% by its American counterpart. Under the deal, TDK will undertake a carve-out process to transfer part of its high-frequency component business. The value of the transferred business is equivalent to roughly 120 billion yen, which accounts for 10% of TDK's group sales.

     An executive at one of TDK's rival electronic component makers said the company would have trouble following TDK's nimble move.

     To begin with, TDK will sell 51% of its stake to Qualcomm. If Qualcomm exercises its option to acquire the remaining stake or TDK exercises its option to sell its own stake in the joint venture, the total transaction value is expected to be $3 billion. If the deal closes as planned, as a starter, it will push up TDK's operating profit by 120-150 billion yen for the January-March quarter of 2017. The number is well over its record operating profit of 98.3 billion yen in fiscal 1997.

     That said, reporting such a spike in profit is not the company's main focus. At a briefing session the same day of the announcement, Kamigama said that the company aims to achieve 15% in both return on equity and operating income margin in five years. The target is higher than its current mid-term target of "over 10%" for both figures through fiscal 2017.

     TDK is focused on three key strategy market segments -- automotive, information and communication technologies, and industrial equipment and energy.

     Market players are largely praising a series of TDK's recent deals with the view that the company is aiming for growth.

     However, shares in TDK are trading at their lowest level since September 2014. One source of concern is TDK's shipment volume for HDD heads, which declined significantly year on year in the third quarter of fiscal 2015. But the lackluster performance is in line with the stocks of other suppliers of smartphone parts. All in all, investors remain cautious over slowing growth in smartphone demand. TDK is no exception.

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