Cover story
MMI Scorecard of EMS Industry Mergers and Acquisitions in 2002
EMS Industry Alliances and Equity Partnerships in 2002
News
HP Taps Solectron To Make Server Boards and Modules
MSL and Videoton Form Alliance
Suntron Partners with Development Firm
Agilent Moving PCBA To Venture
EMS mergers and acquisitions in 2002 were down for the second year in a row (see chart). MMI's annual Scorecard of industry M&A lists 62 deals done last year compared with an adjusted 74 the year before. That's a drop of 16%. Actually, it could be worse. At midyear, MMI found M&A activity down by 27% (July '02, p 3).
Clearly, the factors that held down deal-making in 2001 were present again last year. Saddled with overcapacity, EMS providers were generally not looking to add facilities from another provider. They were also reluctant to take on OEM plants in high-cost areas when so much work and capacity is being shifted to low-cost regions, especially China. OEMs, for their part, are taking longer to make major outsourcing decisions, particularly when divestitures are involved. Gone are the days when EMS companies would accept OEM proposals wholesale. EMS providers now lobby their customers to do more organic outsourcing. Indeed, the last year has seen providers generally placing less emphasis on growth by acquisition and more on organic outsourcing.
So it's no surprise that providers made fewer acquisitions of OEM assets in 2002 than in the prior year. EMS companies made 26 OEM deals last year, down 16% from 31 deals the year before (chart, p. 4). These deals, designated "O" on the Scorecard, still accounted for the largest number of 2002 transactions.
EMS providers also acquired fewer EMS operations of other players. MMI counted 12 such deals for 2002, compared with 17 the previous year (chart below). Designated "C", these deals dropped by 29% last year.
The second largest group of deals consisted of those where providers sought to broaden service offerings outside of the traditional manufacturing area or create a more vertically integrated supply chain. Acquisitions of engineering firms or repair services are examples of this type of deal, marked "S." In 2002, there were 20 service or supply chain extensions, of which four also involved OEM assets.
While much of this activity could have been anticipated, the data did yield one counterintuitive result. In year two of the downturn, the number of new EMS players increased dramatically. These deals, designated "N," went from three in 2001 to nine in 2002. Of the nine, four deals resulted from distressed sales. All told, there were 10 distressed sales, marked "D," with the remainder coming from providers that acquired assets of failed EMS businesses.
As judged by the number of transactions, Sanmina-SCI was the most active deal maker last year. It's possible that two 2002 deals listed for the company actually closed in Q4 2001. This factor would not affect Sanmina-SCI's standing but could introduce a small error in the data, since MMI was unable to obtain confirmation from the company by press time.
Alliances and equity partnerships can often provide an alternative to spending the big bucks on an acquisition. But this activity did not increase in 2002. In fact, it fell off markedly from 18 alliances and partnerships in 2001 to somewhere around nine in 2002, depending on how many Indian firms Flextronics is involved with.
Note: The decision was made to count only once any acquisition that closed in stages in two calendar years. For consistency, one such OEM deal was deleted from the 2001 data. Hence, the revised 2001 total of 74.
Under a new $1.4-billion agreement over five years, Solectron (Milpitas, CA) will produce circuit boards and memory modules for HP's mid- and high-end enterprise servers as well as other products. Solectron will provide these services through its facilities in Puerto Rico and potentially at other sites.
SMART Modular Technologies, part of Solectron's Technology Solutions unit, will supply the modules and perform the PCB assembly in Puerto Rico. According to Solectron, it will do the work in Puerto Rico because the outsourcing is coming from HP's server operations there.
To accommodate this work, Solectron will lease additional space in Mayaguez and expects to hire 265 workers.
The manufacturing and supply agreement increases Solectron's server business with HP over previous levels, while expanding the provider's relationship with HP, its largest customer at 11.7% of sales last quarter. Solectron had done server business with HP before, primarily through Compaq servers.
Solectron has expanded its CRM (customer relationship management) offerings in Europe with the acquisition of Ce.Mar Srl., a provider of call center and technical support services in Italy.
The deal enables Solectron to provide technical support services to the Italian market. These services include call receiving, help desk and e-mail support, and Ce.Mar, based in Milan, handles more than 11,100 requests a day. Major customers of privately held Ce.Mar include HP, Amplifon, Alleanza Assicurazioni, Banca Intesa BCI, Banca Intesa Leasing, Oce, Olivetti, Otis, Philips Medicali and Pirelli.
The Italian company will become part of Solectron's Global Services business unit. Financial terms were not disclosed.
MSL (Concord, MA) and Videoton (Szekesfehervar, Hungary) are entering into a strategic alliance that will offer customers the combined capabilities of both companies.
Privately held Videoton, an MMI Top 50 provider in 2001, is billed as Central Europe's largest EMS company. MSL, a global EMS company, has facilities in Western Europe, but lacks a presence in Central or Eastern Europe. The alliance will address MSL's need for low-cost manufacturing in Europe by giving MSL the ability to send customer products to Videoton's facilities in Hungary and Bulgaria.
Likewise, Videoton can offer its customers global scale through MSL and can leverage MSL's supply chain management capabilities for access to globally competitive components and materials. In addition, Videoton will have access to MSL's product design and engineering center in Valencia, Spain.
According to Bob Bradshaw, MSL chairman, CEO and president, the company is working on two or three opportunities with a potential need for a solution in Central/Eastern Europe. One of these "is sort of a nice sized program for a company of our size. One of them would be a little bit smaller," said Bradshaw in a recent conference call with analysts. Both new and existing programs are involved. In addition, MSL has entered into discussions concerning products being built by Videoton where MSL might be able to provide some leverage for Videoton's procurement activities.
"We have known their executive management team for several years, and there is a high degree of mutual respect among us," stated Bradshaw. He reported that MSL had pursued the alliance over the last year.
With plants in nine locations in Hungary and Bulgaria, Videoton offers a full range of EMS as well as injection molding of plastics, metal fabrication, transportation and logistics, industrial real estate development and project management. The company's major markets are automotive, consumer electronics, household appliances, controls and automation. Videoton reported sales of $255 million for 2001.
EMS provider SMTC (Toronto, Canada) has extended its reach to China by signing an agreement with Alco Electronics (Hong Kong), an ODM and EMS provider that operates in China. Under this agreement, Alco will supply EMS and ODM services to SMTC and its customers as needed.
Alco will manufacture for SMTC at Alco's Chang An campus in the Dongguan region of China. Preproduction and pilot run activity is scheduled to begin late this month, with customer shipments starting in the March timeframe. Alco will also supply plastics, cables and custom metal products.
"This agreement provides our customers with both a cost-effective manufacturing solution in China and access to Alco's extensive ODM services," stated Paul Walker, president and CEO of SMTC. Alco's 30+ years of ODM experience covers a variety of technologies such as acoustics, video processing, wireless communications and power electronics. SMTC can also apply its own engineers for local support in North America.
With revenues of $450 million, Hong Kong-based Alco maintains three locations in mainland China. The ODM/EMS provider primarily serves major Japanese consumer electronics companies. Products under development at Alco include LCD-TVs with DVD players, combination DVD and VCR players/recorders and computer peripheral products.
Suntron (Phoenix, AZ), a publicly held EMS company, has formed a strategic partnership with UMD Technology (Portland, OR), a product development company serving the electronic and medical industries. The partnership will provide engineering services for the RF/wireless, medical and electronic commerce markets.
"We are pleased to extend a partnership to UMD Technology, as this alliance will strengthen our current design service offerings for collaborative product development," stated Michael Eblin, Suntron's COO. "This partnership is an excellent opportunity for Suntron to expand its geographic presence for design services in the Northwest, California and Canada."
UMD operates development and sales offices in Portland, OR, and Seattle, WA. The company was founded last year by UMD president and CEO Matt Bergeron and UMD chairman Gordon Kuenster. Bergeron had served as president of PCB fabricator Praegitzer Industries, now owned by Tyco, and CEO of e2E, acquired by Plexus. Kuenster has been involved with over 10 companies including the startup of two medical firms.
"Suntron's ability to manufacture high-mix products in short cycle times fits well within our current customer base," stated Bergeron. One of UMD's customers is Lucent Medical Systems (Kirkland, WA).
The medical market is attracting providers of all stripes, not just the largest companies. The Suntron alliance above is one example; publicly held HEI (Minneapolis, MN), a microelectronics provider, serves as another. HEI has acquired the Colorado operations of Colorado MEDtech (Boulder, CO) in a deal creating a component design and EMS business for the medical market.
HEI estimates the acquired business will have revenue between $20 and $25 million for 2003 and is projecting that it will be accretive to EPS starting in Q2 of fiscal 2003.
"HEI has been involved in the design and production of microelectronics circuits and products for the medical and hearing business for over 35 years. This acquisition makes us one of the world's leading medical component design and manufacturing outsource businesses. This market remains stable, and we believe that this acquisition will position us for substantial revenue growth and profits as the trend to outsourcing continues to gain momentum in the medical technology market," stated Anthony Fant, CEO of HEI.
HEI specializes in the design and manufacture of high-performance, ultraminiature microelectronic devices and products containing those devices. In addition to serving the hearing and medical markets, HEI supports customers in communications, wireless and contact smart cards, other RF applications, and industrial products.
Colorado MEDtech said the sale is part of a plan to maximize shareholder value. The company is retaining its subsidiary that supplies medical imaging products to the ultrasound market.
Agilent Technologies is in the process of transferring the majority of its PCB assembly operations at its Liberty Lake, WA facility near Spokane to Venture (Singapore). This deal includes the purchase of equipment, but Venture will not be taking over any Agilent employees or facilities. The target date for completion is Oct. 31.
According to a November 2002 statement from Venture, the Agilent work will be split between Venture's NPI center in the US and its manufacturing facility in Malaysia. These PCB assemblies will be used for Agilent products worldwide.
Originally, the two companies had discussed a proposal by which Venture would purchase the PCBA operations at Liberty Lake and continue them at the site for a period (May '02, p. 4).
Venture stated that this deal will further the relationship between the two companies.
New programs...Flextronics (Singapore) has landed a contract to act as the logistics supplier for Xerox's operations in Brazil. As part of the agreement, Xerox sold certain assets from its former logistics center to Flextronics. Flextronics will also manage fulfillment and reverse logistics for Xerox's product line in South America. According to Flextronics, the deal dramatically improves its distribution and logistics capabilities in the region....MSL has announced a number of new wins including two avionics programs. The provider will build cockpit display equipment for both Honeywell's ATS division and Avidyne (Lincoln, MA), and both contracts involve PCB and system assembly. Honeywell's equipment is geared for commercial airliners, while Avidyne's is intended for business and general aviation aircraft. In another new program, MSL will provide build-to-order/configure-to-order services for Lexmark's printer line. As a result, MSL is expanding its Lexmark relationship begun last year (July '02, p. 4). In addition, GlaxoSmithKline has selected MSL to provide product and manufacturing process design services for a new medical device in the pharmaceutical space. MSL will support Glaxo primarily from its facility in Galway, Ireland, where PCBA and plastics can be combined in a high-speed environment under MSL's Automated Manufacturing Solutions group. Finally, MSL will build complex PCB assemblies for digital video server systems from SeaChange International. The PCBA work will be done in MSL's Lowell, MA facility....Solectron will manufacture a board for Infineon's Bluetooth Communication Gateway solution designed for automotive "infotainment" systems....Powerwave Technologies (Santa Ana, CA), a supplier of RF power amplifiers for wireless infrastructure, reported that during Q4 2002 it achieved its first complete single-carrier product build utilizing Celestica's facility in mainland China. One may recall that Powerwave recently decided to move new programs from Plexus' San Diego, CA facility to competitor facilities in Asia that were already manufacturing for Powerwave (Dec. '02, p. 1). The company plans to outsource additional products to its contract manufacturers during the year....Next Level Communications (Rohnert Park, CA) has selected Plexus (Neenah, WI) as its primary EMS provider. Plexus will manufacture Next Level's network access equipment in the provider's Nampa, ID facility and assist in engineering and design support. This equipment includes a broadband digital terminal, access multiplexers and set-top boxes for bundling digital TV, high-speed Internet access and telephone services. Also, NMS Communications (Framingham, MA), a supplier of carrier-grade communications products and services, recently consolidated all of its manufacturing and distribution relationships with a single EMS partner. Plexus has identified NMS as a new customer, for whom Plexus is ramping production. Note that NMS did encounter supply chain problems during the shift to a single EMS provider, but looking ahead, the company said it has fully recovered from those problems....Citing a report in a Japanese publication, Reuters has reported that Japan's Mitsubishi Electric is outsourcing production of PC servers to another Japanese conglomerate, NEC. NEC already makes PCs for Mitsubishi.
New facilities in China...Nam Tai Electronics (Hong Kong) plans to spend an estimated $40 million to further expand its manufacturing facilities in Shenzhen. The project will add about 250,000 ft2, and completion is expected before the end of September 2004. New production lines will mainly focus on mobile-phone components including LCD modules and RF modules as well as the manufacture of complete handsets....Benchmark Electronics (Angleton, TX) anticipates that its new greenfield facility in China will reach preproduction in the current quarter.
More consolidation and restructuring...Solectron is consolidating its facilities in Hortolandia and Sao Jose dos Compos, Brazil, into another Brazilian facility that the provider acquired from HP last year in Jaguariuna. Solectron is also maintaining a small facility in Hortolandia....To further reduce capacity, Celestica has announced an restructuring charge between $50 and $70 million to be recorded during 2003. The restructuring will be focused primarily on European operations.
People on the move...Rising standards for corporate governance have reached the EMS industry. As Solectron has done, Flextronics has decided to split the roles of CEO and chairman of the board. Effective last month, CEO Michael Marks gave up his chairman title, and Richard Sharp, a board member since 1993, became non-executive chairman of the board. Sharp served as CEO of Circuit City Stores from 1986 to 2000....Iain Kennedy, a senior VP at Celestica, recently took charge of the company's global supply chain management and IT organizations. This change came with the retirement of Andrew Gort, who was executive VP of global supply chain.
