Hon Hai Makes an Ever-Larger Impression
Leslie Norton / Barrons Nov 10, 2003
Emerging Markets
HON HAI PRECISION INDUSTRY is Taiwan's largest manufacturer by sales, but is unknown to many U.S. investors. (Taiwan's largest company by market cap, Taiwan Semiconductor Manufacturing, is renowned.) But last week, Hon Hai, a contract manufacturer that makes electronic gear for other companies, made its footprint a lot bigger. Name recognition may soon follow.
Hon Hai agreed to buy Ambit Microsystems, which makes networking equipment, in a stock swap valued at more than $1 billion. The announcement came a day after Cisco Systems -- Hon Hai makes some of its components -- said fiscal first-quarter earnings had surged. They hope to finalize the deal in March.
The deal seems a good one for Hon Hai shareholders. Hon Hai stock is up 54% this year, to a recent NT$154 (U.S.$4.53), or about 23 times earnings. Meanwhile, Ambit's shares are down 10% this year amid production issues and some earnings disappointments; at NT$92.50 last week, they traded at 14 times earnings. But most Ambit shareholders must be howling. The deal represents a premium of just 11.9% over Ambit's closing price. Yet Ambit's operating margin is a nice 9.35%, versus 7.4% for Hon Hai. (Both are better yet than the under 2% margin for both Flextronics and Sanmina-SCI, some of the biggest contract manufacturers .)
Meanwhile, Ambit is a supplier to the enormously successful broadband outfit Yahoo Japan. Still, Ambit's major shareholder is Acer, the computer maker that's now able to convert its illiquid 15% stake in Ambit to a more liquid 1.5% stake in Hon Hai.
Hon Hai, doing business under the name Foxconn, makes a lot of equipment in China, including personal computers for Hewlett-Packard, Playstation 2 for Sony, and cellphones. It's been seen as a firm that's spent less than it might on research and development, so acquiring Ambit seems logical. The merger lets Hon Hai compete against publicly traded, stand-alone networking original-equipment manufacturers like Askey Computer, Accton Technology, D-Link, Cybertan Technology, and Turbocomm Tech, says Taiwan specialist Lee Meyer, vice president of Asian technology sales with CLSA Emerging Markets in New York City.
Eventually, Meyer hazards, Hon Hai may even challenge giants like China's Huawei Technologies, which has battled Cisco, and UT Starcom. Hon Hai is already helping make Cisco's switchers and routers, and could do more as it gains expertise in wireless products. Merrill Lynch, which thinks Hon Hai stock is worth NT$200, wrote last week that the merger enhances Hon Hai's growth prospects "beyond the more immediate handset-growth story."
The deal also attests to the appetite for wireless broadband -- what some call fourth-generation telephony. "In other words, long-range Wi-Fi," says Meyer of CLSA. Transmitting voice over the Internet using wireless broadband could let customers avoid voice tariffs. That's bad news for service providers. The biggest proponent of the wireless broadband standard is the WiMax Forum, heavily supported by Intel, which is developing its next-generation Centrino offering based on the interface.
Meyer observes that other networking hardware makers on WiMax's board include publicly traded Alvarion, Proxim (which will have WiMax hardware on the market by the middle of next year) and Airspan. "The market should be huge. The question is who will be the providers for the WiMax equipment," says Meyer. "Proxim already uses Universal Scientific, Ambit, and Accton in Taiwan." After last week, more companies may be in play. <snip> |
