Breaking out of electronics-only: the move into pharmaceuticals (2017)

What a defensive diversification left behind

Taiyo Holdings’ entry into pharmaceuticals began from the idea of smoothing an electronics-only structure — one that, for all its world-leading technology, had left its results at the mercy of the business cycle — with a business whose cycle runs differently. Buying the manufacturing-and-marketing rights to long-listed drugs and then taking in a factory, a two-stage approach, can be read as a deft design for assembling the skeleton of a business, development aside, in a short span of time. Under a structure in which an accountant-turned-president held finance and M&A directly in his own hands, the diversification that redirected the cash earned in electronic materials toward a new pillar did, unmistakably, reach a visible scale.

Yet the fact that profitability did not keep pace as scale grew is what decided what became of this choice. The goodwill that piled up weighed on earnings, and held against the yardstick of capital efficiency, the investment in pharmaceuticals left room to appear a poor bargain. A diversification meant for defence would instead become one cause of conflict with shareholders — that course lies beyond the scope of this account, but the question of why a leader in electronic materials turned toward pharmaceuticals also serves as the groundwork for reading the later struggle over going private. Whether to draw the company’s outline around efficiency or around diversification is a question still without a settled answer.