SANM It's one montrous stock and company.
Sanmina to Buy SCI for $4.5 Billion
Uniting Electronics Manufacturers
By NIKHIL DEOGUN and SCOTT THURM
Staff Reporters of THE WALL STREET JOURNAL
Sanmina Corp., snapping up a venerable rival roughly twice its size, has agreed to acquire SCI Systems Inc. for $4.5 billion in stock in a deal that would unite two large contract electronics manufacturers.
Sanmina would assume about $1.4 billion in debt and would boast about $14 billion in annualized revenue after this transaction. Both boards have approved the transaction, which would mark one of the largest acquisitions this year in the beleaguered technology sector.
Insourcing
SANMINA
Chairman & CEO: Jure Sola
Headquarters: San Jose, Calif.
Employees: 19,000
Six-month revenue: $2.67 billion*
Six-month net income: $178.2 million*
Products: Electronics and services related to automated manufacturing
SCI SYSTEMS
Chairman & CEO: A. Eugene Sapp, Jr.
Headquarters: Huntsville, Ala.
Employees: 32,000
Nine-month revenue: $6.64 billion**
Nine-month net income: $100.7 million**
Services: Manufacturing and supply-chain services
*For period ended March 31, 2001
**For period ended March 31, 2001
Sources: the companies
Contract manufacturers have been riding the wave of outsourcing, as a host of name-brand electronics companies -- from computer and cellular-phone makers to networking-device companies -- turn to them to make electronic components and, increasingly, finished products. But this deal comes amid a deep slump in sales of technology products, which has battered the $100 billion-a-year manufacturing industry. Companies that have spent years assembling global networks of factories now find those plants running far under capacity. The industry has laid off more than 40,000 workers so far this year.
As a result, industry executives have been predicting additional mergers among contract manufacturers to reduce capacity and cut costs. Indeed, this deal could spur additional consolidation, as the merged company would be roughly the same size as Flextronics International Ltd., trailing only Solectron Corp.
Under terms of the transaction, Sanmina would offer a fixed exchange ratio of 1.36 of its shares for each share of SCI, representing a fairly modest premium -- about 20% -- to where SCI stock is currently trading but nearly double its 52-week low, reached nearly four months ago, of $15.15. At 4 p.m. Friday in Nasdaq Stock Market trading, shares of Sanmina, San Jose, Calif., slipped 95 cents to $22.14, after jumping 15% on Thursday. SCI, Huntsville, Ala., rose seven cents to $25.17 on the New York Stock Exchange. Based on Friday's stock prices, each share of SCI is being valued at $30.11. Both companies' stocks were trading in the $60 range last fall.
The two companies expect $100 to $150 million in cost savings, and say the transaction would add immediately to earnings.
Sanmina is much smaller than SCI, but operates in a higher-margin segment of making communications equipment, so it boasts a market capitalization of about $7 billion, twice the value of SCI, whose skill is mass-producing personal computers, which have lower profit margins. Indeed, a major reason for the deal is to combine Sanmina's expertise in the complicated innards of telecommunications equipment with SCI's PC know-how, so the merged company can better compete with global powerhouses such as Solectron and Flextronics.
"It's an excellent mix of businesses," said A. Eugene Sapp, Jr., SCI's chairman and chief executive, adding the deal wasn't simply designed to derive economies of scale. Mr. Sapp will become co-chairman of the merged entity before retiring in one year. Three SCI directors, including Mr. Sapp, will join Sanmina's seven-member board.
Sanmina's top managers, including Chairman and Chief Executive Jure Sola and President Randy Furr, will remain in place. Mr. Sola said he had been informally discussing with SCI executives combining the two companies for several years. Serious negotiations began in April.
Mr. Sola said he was not deterred by the tech slump. "This is either the time to put your heads in the sand or to make a better company," he said. "You've got to think long-term. It is better to do it now instead of a year from now." Besides, he noted that the slowdown would allow the two companies to focus on integrating their operations "instead of worrying how we're going to meet daily shipments."
Sanmina last month sharply lowered financial targets for its fiscal third quarter, which ended June 30, and eliminated about 8,000 jobs, or 30% of its work force. Sanmina said it expects earnings per share, excluding some items, of 10 cents, half of its previous forecast. Sanmina said quarterly revenue would be $760 million to $775 million, roughly 19% less than the $900 million to $1 billion it had forecast in April.
SCI Systems Slashes Work Force, Plans to Take 3rd-Quarter Charge (Feb. 27)
Founded in 1980 by Mr. Sola, a native of Croatia, Sanmina has grown rapidly through acquisitions in recent years. In March, Sanmina acquired enclosure maker AB Segerstrom & Svensson of Sweden for $511 million. Last year, Sanmina bought circuit-board maker Hadco Corp. for $1.1 billion.
Like other contract manufacturers, Sanmina also has been buying factories from name-brand electronics makers. In the past two years, it has acquired plants from Lucent Technologies Inc., Nortel Networks Corp. and Alcatel SA of France.
Sanmina is less diversified than other contract manufacturers, deriving roughly three-fourths of its revenue from telecommunications-equipment makers such as Nortel, Lucent and Cisco Systems Inc. That concentration has spelled trouble recently, amid a sharp downturn in telecom spending.
SCI is one of the oldest contract electronics manufacturers, and was the unrivaled industry leader until the late 1990s. Founded in 1961 as Space Craft Inc., the company initially concentrated on the space industry around its Huntsville, Ala., headquarters. After a stint as a defense contractor, the company found its niche making the guts of personal computers for International Business Machines Corp. in the early 1980s.
SCI initially missed out on the boom in making products for communications equipment but has been diversifying its business in the past few years. In February, the company said it would reduce the size of its work force by 10%, or 3,800 jobs, in part because of a softening personal-computer market. The company also said it would shutter some plants.
Merrill Lynch & Co. served as Sanmina's financial adviser, while SCI was advised by Goldman Sachs Group Inc.
Write to Nikhil Deogun at nik.deogun@wsj.com and Scott Thurm at scott.thurm@wsj.com |
