11/24/99 - Flextronics: We're not done yet -- Dii acquisition puts
CEM closer to $25B mark
Nov. 24, 1999 (Electronic Buyers News - CMP via COMTEX) -- It's the
biggest merger the contract electronics manufacturing industry has
ever seen.
But there are indications that Flextronics International Ltd.'s $2.4
billion acquisition of Dii Group Inc. last week was only the company's
first major salvo in the battle for the top spot in the CEM industry.
Even before the ink dried on their agreement, Flextronics and Dii began
to pursue several major OEMs, including Siemens AG and
Hewlett-Packard Co., to secure more outsourcing contracts by
showcasing their newly developed manufacturing muscle.
Sources close to the companies told EBN last week that the
discussions could aggregate as much as $1 billion in business for the
combined company and that an announcement on some of the deals
could be made before the merger is concluded next April.
Any future outsourcing wins resulting from the new combination could
only intensify competition within the industry, analysts said.
"Dii is scaling up, and that should be a concern to other midtier
players," said Roger Norberg, an analyst at U.S. Bancorp Piper Jaffray
Inc., Minneapolis. "Economically, the electronics manufacturing
services (EMS) model has turned the corner. OEMs are going to be
asking, 'What do you do to make me more competitive?' "
That's a question managers at top-tier CEMs would like to have
answered. It's also one of the reasons behind the growing pace of
consolidation within the industry.
Until recently, however, the major CEMs-with a few exceptions-have
been satisfied to go after captive OEM manufacturing facilities.
Flextronics' acquisition of Dii, a major industry player with services in
communications, industrial instrumentation, office automation,
mainframes, and servers, is set to change that.
"What you've seen is symptomatic of the industry," said Bob
McNamara, an analyst at Broadview International LLC, a Fort Lee,
N.J.-based consulting firm that acted as a financial adviser to Dii in the
Flextronics transaction.
"It's becoming clear that EMS companies have to be global, be in
Europe and Asia, and do it immediately," McNamara said. "If you don't
have the resources to do it, you'll have to partner with a bigger
company."
What does Dii have to offer?
To even the most envious competitor, the teaming of Flextronics and
Dii sounds like a match made in corporate-merger heaven.
That's probably why Flextronics bought for its new bride the shiniest
diamond around-a 29% premium on Dii's Nov. 19 closing price of
$51.01.
Flextronics has reasons to look forward to marital bliss, analysts said.
The merger adds $2.2 billion to the company's sales and another 2.9
million sq. ft. to the San Jose-based CEM's manufacturing facility.
With that acquisition also comes an expanded business model that
now includes printed-wiring-board fabrication, and locations in "various
places where Flextronics would like to be, including Orange County,
Calif., Colorado, New York, and Florida, said Michael Marks, chairman
and chief executive of Flextronics, during a conference call with
analysts last week.
"The acquisition primarily increases Flextronics' size, adds electronics
manufacturing services locations in Ireland, Germany, and [the] Czech
Republic, as well as expands capacity in some low-cost areas like
China and Mexico," said J. Keith Dunne, an analyst at Robertson
Stephens Inc., San Francisco.
Perhaps the greatest attraction of the transaction, according to Marks,
was the addition of 200 Dii ASIC and mixed-signal design engineers to
Flextronics' payroll.
"This is a very strong group, and it's one area that differentiates them,"
Marks said. "If they didn't have it, I probably wouldn't have done the
deal, because it's a very powerful group and it's going to make us very
strong."
That may be putting it mildly. In the last three years, customer
demand for engineering and design services has stretched Flextronics,
which often had to turn down businesses because of capacity and
personnel-related problems.
"With the addition of a world-class ASIC and gate-array development
group in San Jose, Israel, and India through the Dii semiconductor
group, Flextronics will have one of the most robust global engineering
groups in our industry," Marks said.
Flextronics is the world's No. 5 CEM. The acquisition of Dii will propel
it into the No. 4 position, according to analysts. But the company is
eager to move even higher.
Marks said during an interview that his goal is to raise revenue to
between $25 billion and $27 billion within a period of five years. To
achieve that objective, Flextronics is going to be hunting for more
acquisitions and is already looking to add OEM repair activities to its
operations, he added.
"I'm never going to say 'let's sit back and watch the business grow,'"
Marks said. "We're certainly not done doing acquisitions. This is a
business in transition, and there's quite a number of services that our
customers want us to provide for them that we don't currently provide.
We don't do any repairs, so at some point, we're going to go buy a
repair company too."
By the time it wraps up the Dii merger, the new Flextronics should
have enough ammunition and know-how to manage the expansion.
Flextronics, which has been stretched thin at the management level in
recent years, is getting dozens of senior managers from Dii.
The combined company will have $681 million in cash by the end of
this year, enough for any of the smaller-scale acquisitions that Marks
and his team have in mind. It will also have combined sales of nearly
$3.8 billion, which should shoot up to "at least $6 billion by the end of
2000," he said.
And Dii's gains?
Dii was already on the way to becoming a tier-one player even before
the latest deal. Flextronics gives the company the means of achieving
that objective painlessly and ahead of its competitors, many of which
will eventually have to take a similar step, according to analysts.
In recent quarters, Dii streamlined its operations to focus on just two
businesses: contract manufacturing and printed-circuit-board
fabrication.
Its high-margin Multek Inc. unit is the only PCB maker with facilities in
Asia, Europe, North America, and South America. What Multek and
Dovatron International Inc., Dii's CEM unit, lacked was access to major
OEM customers. As a result, the company had excess capacity at
several of its plants, another key attraction for Flextronics.
"Dii has some excess capacity just across the street from Flextronics'
plant in China, and Flextronics can use that capacity while getting a
competitor off its back," said U.S. Bancorp Piper Jaffray's Norberg.
Consummating the relationship may be the biggest headache the two
companies will face as they try to integrate their operations in the
months ahead.
"Among the risks are an economic downturn resulting in lower
industrywide demand for products produced by Flextronics, a
deceleration in the pace of outsourcing, and a delay in successfully
integrating recent and pending acquisitions," Robertson Stephens'
Dunne said.
Marks, however, dismissed such fears. Both companies have had
some experience ironing out merger wrinkles and should be able to
pull this off successfully, he said.
"Anytime you have the merger of two big organizations, there's always
a risk that it would be difficult getting everybody comfortable and
integrating them properly," Marks said. "That's not going to happen to
us. We know [Dii] very well, and we've seen their factories and met the
senior managers. This group is our style and will integrate very well."
The challenge for midtier players
For other midtier CEMs, Dii's link with Flextronics is a wake-up call.
While OEM outsourcing continues to accelerate, CEMs are now
expected to provide a wider product offering, as well as a bigger
presence in the lower-wage parts of the globe.
The only way to achieve such a presence and become even more
visible to OEMs, according to analysts, is for mid-tier companies to
grow by buying more OEM facilities or partnering with larger industry
players.
"My thesis on this is that when the industry is growing by leaps and
bounds, it's a very forgiving market. But when growth slows or margins
decline, as is beginning to happen, it exposes the weakness of the
smaller players," McNamara said. "This is when the boys are
separated from the men."
The implication is that smaller players may no longer be able to survive
solely by marketing themselves as niche players within restricted
domestic markets, analysts said.
"Gross margins are shrinking across the board, but SG&A have
remained constant, so midtier companies either have to step up their
growth or sell their business now," said Broadview's McNamara. "They
could also wait to do it later and perhaps pay a higher price for being
tardy."
It's not only midtier CEMs that are likely to come under pressure,
though. With Flextronics signaling its intention to go for the top
position, other industry titans must become more aggressive in going
after captive OEM facilities, he said.
"I would not expect SCI Systems and Solectron to do this kind of deal,
but Celestica has grown through acquisitions and will continue to do
it," McNamara said. "Sanmina, too, has grown through acquisitions
but is still a domestic player and needs to get international."
---
Publicly held CEMs based in North America
For 12 months ended Sept./Oct.
1. Solectron; Revenue ($B): 8.39
2. SCI; Revenue ($B): 6.81
3. Celestica; Revenue ($B): 4.61
4. Flextronics; Revenue ($B): 2.49
5. Jabil Circuit; Revenue ($B): 2.00
6. Benchmark; Revenue ($B): 1.70
7. Sanmina; Revenue ($B): 1.21
8. Dii; Revenue ($B): 1.15
9. Plexus; Revenue ($B): 0.49
10. Act; Revenue ($B): 0.42
---
Flextronics International
Headquarters: San Jose
Chief executive: Michael Marks
Fiscal 1999 revenue: $1.81 billion
Fiscal 2000 revenue: $4.96 billion (including Dii)
Manufacturing capabilities:
PCB design and layout
PCB assembly
RF engineering
Full system build
Demand-flow technology
Plastic-injection molding
Custom cardboard packaging
Metal stamping
Software and EDP services
Plastic components and assemblies
Repair/warranty
1CT/function/ESS Test
Backplane assembly
Hand assembly
Flip chip/chip-on-board
Order fulfillment
JIT distribution
Systems test
Complex system build
---
Dii Group
Headquarters: Niwot, Colo.
Chief executive: Ronald Budacz
1998 revenue: $925 million
Core business units:
Dovatron International
Dii Technologies
Dii Semiconductor
Multek
Dii Interconnect Systems
Contract manufacturing
Engineering services
ASIC and manufacturing services
Printed-circuit-board design and production
Backpanel design and manufacturing
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By: Bolaji Ojo
Copyright 1999 CMP Media Inc. |
