TheDeal.com

Richard Morgan, September 28, 2007

Tokyo-based Columbia Music Entertainment Inc. entered into a $13 million share agreement Friday, Sept. 28, to acquire TDK Core Co. Ltd. — a designer, producer and seller of music, game and educational software — from its Tokyo-based parent company, TDK Corp.

TDK Core's acquisition advances a trend by music companies to expand into other areas as a means to offset sagging CD sales. The market responded to the diversification strategy by sending CME's Nikkei-listed stock up 20% on heavy volume.

"The TDK Core acquisition is genuinely strategic for CME, expanding the company's presence into the games and education business and deepening its music catalog," said ZelnickMedia Corp. partner Jim Friedlich.

"The purchase is also highly accretive." Strauss Zelnick, whose New York-based investment firm ZelnickMedia manages CME, also serves as chairman of the independent music label. Ripplewood Holdings LLC, since renamed RHJ International SA, acquired 30% of CME in 2001 and assumed control of a 20% stake held by Hitachi Ltd.

While TDK Core gives CME new classes of content — software for games and education — the acquirer said it considered the product lines sufficiently similar to its legacy music "software" business to accommodate efficiencies. Cited as particularly ripe for integration are TDK Core's sales and production channels.

TDK Core also produces high-quality visual content, including opera and ballet titles, which CME plans to market through its classical department. CME, which has amassed a catalog of more than 140,000 titles over its 97-year history, claimed to be especially optimistic about the visual content acquired with TDK Core in light of the 2011 target date for the "full digitalization" of Japanese television.

As for games, Zelnick's experience with New York-based Take-Two Interactive Software Inc. will likely be put to use at the game software business that TDK Core brings to CME. Take-Two, best known for its "Grand Theft Auto" video game series, not only entered into a management agreement with ZelnickMedia in March but, as part of a management coup at that time, installed Zelnick as chairman and fellow ZelnickMedia partner Ben Feder as CEO.

ZelnickMedia also has an investment in Arkadium Inc., a New York-based online game company, and a successful historic investment in UGO Networks, which was recently sold to Hearst Corp.

In addition, Zelnick served as president and CEO of Crystal Dynamics Inc., a producer and distributor of interactive game software, in the early 1990s. That post preceded a two-year stint as the president and CEO of BMG Entertainment and followed a four-year run at the upper reaches of Twentieth Century Fox Film Corp.