Consoldition of contract manufacturers taking place:
lightreading.com
OCTOBER 16, 2001
Contract Manufacturers Consolidate
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Last week's $475 million purchase by Celestica Inc. (NYSE, Toronto: CLS - message board) of Asian competitor Omni Industries Ltd. highlights an ongoing trend toward aggressive mergers and acquisitions in the world of contract manufacturing (see Celestica Completes Omni Buy ).
The acquisition brings the total of Celestica's purchases this year to well over $1 billion. These include smaller competitors Primetech Electronics Inc. and Sagem CR, in addition to switching equipment and wireless gear facilities from customers Lucent Technologies Inc. (NYSE: LU - message board) and Motorola Inc. (NYSE: MOT - message board).
Celestica's not alone. As the economic winter sets in, companies that put together the systems and components for suppliers of broadband gear are digging deep into their war chests. And they're funding a series of deals they hope will put them in charge when the sun shines again.
Examples abound:
Flextronics International (Nasdaq: FLEX - message board) bought test equipment vendor Instrumentation Engineering in September. Earlier this year, it snapped up two optical subsystem makers, Wave Optics Inc. and Fico Fiber Optics Inc., in an effort to build out the photonics business unit it formed last fall. This year, Flextronics also bought Texas wireless integrator Telecom Global Solutions Inc. and purchased a mobile phone manufacturing unit of Ericsson AB (Nasdaq: ERICY - message board). All terms were undisclosed.
Jabil Circuit Inc. in June paid roughly $250 million for European manufacturing facilities of Marconi Corp. PLC (Nasdaq/London: MONI - message board), one of its customers (see Marconi Sells 5 Plants for $390M ).
Sanmina Corp. (Nasdaq: SANM - message board) acquired the Richardson, Texas, manufacturing plants of Alcatel SA (NYSE: ALA - message board; Paris: CGEP:PA) for an undisclosed sum and announced plans to merge with competitor SCI Systems Inc. (NYSE: SCI - message board) for about $6 billion (see Unknown Document 8262 and Sanmina, SCI Merger Unopposed ). Sanmina also has acquired a company that specializes in making electronic enclosures, for about $111 million (see Sanmina To Buy E-M Assets ).
Solectron Corp., a key competitor in this space, has made at least five acquisitions this year, including the purchase in August of Iphotonics Inc., a startup that offers "integration, manufacturing, as well as design and test services to optical equipment manufacturers" (see Solectron to Buy Iphotonics ). Terms were undisclosed. Solectron has also arranged to buy competitor C-MAC Industries Inc. for about $2.7 billion, despite an industry outcry (see Solectron Gets Spanked ). And it acquired a DWDM module plant from customer Cisco Systems Inc. (Nasdaq: CSCO - message board) in May (again, terms undisclosed -- see Solectron Buys Cisco's DWDM Plant ).
"Companies in this space are using the downturn to build out incremental capacity from a technological and overall services standpoint," says analyst Chris Whitmore of Deutsche Banc Alex Brown LLC.
Whitmore and other analysts say manufacturers are pursuing opportunities in three key directions: They're buying up facilities from OEM customers in order to get more traction with those customers. They're buying companies that give them expertise or service capabilities that round out their ability to address end-to-end customer requirements. And they're buying up smaller players in an effort to reduce competition.
With its acquisition of Iphotonics, for instance, Solectron has gained the ability to create specialized optical gear for companies such as ONI Systems Inc. (Nasdaq: ONIS - message board) (see ONI's Secret Weapon ). Flextronics also has bought itself the expertise it needed in photonic subsystems manufacturing. And nearly all the top-tier contract manufacturers have extended their geographic reach by purchasing companies in Asia.
How can all this be happening in the current economic climate? Clearly, companies involved in manufacturing broadband gear are suffering from the same financial woes plaguing their OEM customers, but they're meeting the problem a bit differently (see Sanmina Lowers Outlook and Solectron Posts 6 Cents EPS, $250M Loss ).
For one thing, they're making M&A a priority. "We've mapped out what it will take to fill the needs of our customers for at least the next five years," says Arthur L. Chait, corporate VP of worldwide marketing at Solectron. Acquiring companies is key to the strategy for filling those needs. And while the industry's depressed right now, smart companies are planning ways to come out ahead in the inevitable upturn, he asserts.
Helping the trend is a ready supply of money to fund M&A for large players. "Most companies have been able to continue to raise capital based on [the assumption} that there are years of strong outsourcing left to come," says analyst Jeff Rosenberg of William Blair and Co.
Manufacturers admit that the downturn has made M&A easier to pursue. Fire sales have multiplied, and larger equipment companies are seeking to divest the costs and complexities of manufacturing their own gear.
"We see a few customers taking advantage of a bad year to focus on their core competencies" and take some actions they may have been putting off, says Solectron's Chait.
He supports the hypothesis that as the markets for service provider and enterprise equipment turn around, outsourcers will be increasingly called into play by major OEMs. But the winners in the market, he maintains, will require advanced technology, worldwide service capabilities, and the ability to provide start-to-finish services in order to stay on top.
These requirements are likely to keep the top players in an elite club of their own. Indeed, sources say the end result of all the M&A will be a market very much like today's, albeit bigger in overall sales volume. "The strong are going to get stronger," says Whitmore. Today's top-tier players, including Celestica, Flextronics, Jabil, Sanmina, and Solectron, now own roughly 50 percent of the market, he says. By the time the economy picks up, they'll be on their way to owning 75 percent.
Chait looks forward to that: "This is a market with a handful of top players and hundreds of little ones." And it will probably stay that way. One or two small firms may enter the top tier, and one or two key players fall off, he says, but future contract manufacturing will probably stay concentrated.
— Mary Jander, Senior Editor, Light Reading
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