MMI February 2004
Vol. 14, No. 2: February 2004
Table of Contents — Headlines
M&A Deals Down for Third Straight Year
Smaller players buck trend
The number of EMS mergers and acquisitions fell for the third year in a row in 2003 (see first chart). MMI’s annual Scorecard of M&A deals closed in the EMS industry lists a total of 45 transactions last year, down from an updated sum of 64 deals in 2002. (See Scorecard tables below.) From 2002 to 2003, the M&A total dropped 30%. However, deal-making among providers below the top tier actually increased in 2003.
After three straight years of declines, M&A deals done last year ended up 59% below the 2000 peak of 111. Overcapacity produced by three years of end-market weakness continued to throttle M&A activity. What’s more, the shift of manufacturing to low-cost regions made acquisitions in high-cost areas less appealing, especially to the largest providers that acquired OEM operations in those areas.
Indeed, tier-one providers reduced their flow of closed deals to a trickle last year. The top tier made just nine acquisitions in 2003, compared with 34 in 2002. That’s a drop of 74%. The drop-off is even more telling when it comes to purchases of OEM manufacturing assets. Tier-one companies made public only three such purchases last year, compared with 18 in 2002.
Nonetheless, providers below the top tier collectively made more deals in 2003 than in 2002. These smaller providers completed 36 transactions last year, up from 30 in 2002. Moreover, these providers accounted for the lion’s share 80% of all deals closed in 2003. This share increased from 47% in 2002. In some cases, these providers bought assets of OEM manufacturing operations that might have attracted tier-one providers before the downturn. In other deals, smaller players decided that 2003 was a good time to expand their EMS operations by acquiring a competitor’s business or an additional capability.
For 2003, providers made 18 acquisitions of assets divested by OEMs. (These deals are designated “O” on the Scorecard.) OEM divestitures declined by 36% from 28 the year before (see chart below). The bulk of these 2003 deals involved manufacturing operations, but providers also bought OEM assets in design, mechanics, logistics and asset recovery. As in 2002, these OEM deals accounted for the largest number of transactions in 2003.
A second category for EMS deals consists of acquisitions of competitor operations (designated “C”). Unlike OEM asset purchases, deal-making in this category remained nearly constant in 2003. The Scorecard shows 11 acquisitions of EMS operations in 2003 compared with 12 in 2002 (chart below).
Another common type of EMS deal is what MMI calls a service or supply chain extension (designated “S” on the Scorecard). In these deals, a provider makes an acquisition to either extend capabilities outside manufacturing for horizontal integration or capture supply-chain activities for vertical integration. Horizontal (service) extensions include acquisitions of design groups, while vertical (supply chain) integration calls for adding operations in areas such as plastics and sheet metal fabrication. There were 14 of these service or supply extensions, including five overlapping cases where OEM assets were also involved, as mentioned earlier.
In 2003, seven new players (designated “N”) emerged in the EMS industry. All but two resulted from a buyout or buyback of an EMS operation from a larger EMS company. Although closing EMS operations was the most frequently used option in restructuring programs, large and medium-sized providers also sold off some non-strategic operations that often became independent EMS companies. Despite market weakness, and in some cases because of it, a stream of new players has come forth over the past two years. Nine new players appeared in 2002.
Reflecting the overall decline in transactions last year, the largest number of deals closed in 2003 by any provider was three, and three providers reached this total. Only one of these was a tier-one player. In contrast, three EMS companies, all from the top tier, completed seven or more acquisitions the year before.
Still, acquisitions are not the only way to go. An alternative is alliances and equity partnerships, and they gained popularity in 2003. EMS providers entered into 16 of these arrangements last year, compared with around nine in 2002. In these cases, an EMS provider typically gained through its partner a capability that the provider lacked. Alliances and equity partnerships in 2003 addressed needs such as access to technology, design expertise, service capabilities, and manufacturing locations (see last table below).
Sanmina-SCI Adding ODM Products
Sanmina-SCI (San Jose, CA) offers yet another example of an ODM offering that is branching out (Nov. 2003, p. 2-4). The company’s latest annual report reveals more ODM products in development. Based on the ODM products displayed in the report, Sanmina-SCI has extended its ODM business into optical products and set-top boxes.
The annual report presents a selection of ODM products currently in development at Sanmina-SCI. Among these products are two optical modules and a set-top box. On the optical side, the company has designed an optical module control platform for the communications market and a ruggedized EDFA (erbium-doped fiber amplifier) for defense and aerospace. An EDFA amplifies a modulated laser beam directly without converting it to an electronic signal. EDFAs are typically used as repeaters in fiberoptic transmission systems. The set-top box designed by Sanmina-SCI is a DVB-S receiver, that is, a digital video broadcast receiver for satellite reception. This product goes in the multimedia systems category.
Other ODM products displayed in the report were announced previously. It showed a high-end server, two products based on InfiniBand technology and an EcoBay high-performance enclosure. Through the acquisition of Newisys, Sanmina-SCI has introduced the Newisys 4300, an enterprise-class server (July 2003, p. 3-4). The report also included an 8-port 4x InfiniBand switch and an InfiniBand host channel adapter designed by Sanmina-SCI. All of these products are intended for the same end market: enterprise computing and storage systems.
According to the annual report, the company’s Global Technology Solutions group includes about 600 designers and engineers located in 14 design and NPI centers. This group supports both ODM and EMS work.
Solectron Firms Up Sale of SMART Modular
As part of a previously disclosed plan to unload non-core businesses, Solectron (Milpitas, CA) has signed a definitive agreement to sell SMART Modular Technologies and its affiliated companies to three private investment groups. One of them is associated with Ajay Shah, a cofounder of SMART Modular and its former chairman and CEO.
Shah Management, Texas Pacific Group and Francisco Partners will purchase SMART Modular for about $100 million in cash. Solectron originally acquired SMART Modular in a 1999 stock deal for about $2 billion.
Solectron is not selling all of SMART Modular’s assets. The provider will retain SMART Modular’s electronics assembly sites in Aguadilla and Mayaguez, Puerto Rico.
SMART Modular is one of seven businesses that Solectron is divesting (Dec. 2003, p. 5). Earlier this year, Solectron completed the sale of Dy 4 Systems to Curtiss-Wright (Roseland, NJ) for $110 million in cash.
Ajay Shah joined Solectron in 1999 as head of its Technology Solutions business. More recently, he served as a member of Solectron’s board, from which he resigned last year (Sept. 2003, p. 7).
LaBarge Acquires Pinnacle
LaBarge (St. Louis, MO), a publicly held EMS provider, has added industrial business with the purchase of Pinnacle Electronics (Pittsburgh, PA), a privately owned EMS company. The price was $41 million in cash, subject to a post-closing adjustment based on Pinnacle’s net working capital at closing.
Focusing on industrial customers in non-military markets, Pinnacle generated sales of about $38 million last year and is said to be profitable. Markets served by Pinnacle include factory automation, specialized instrumentation, material handling and packaging. Two of Pinnacle’s customers are Owens-Illinois and Keithley Instruments. Applications in the glass container fabrication, scientific instrumentation and mining industries accounted for about 73% of Pinnacle’s 2003 business.
Operating a 144,000-ft2 facility in East Pittsburgh, Pinnacle offers traditional EMS as well as the manufacture of cables and harnesses and electronic/electromechanical systems. Like LaBarge, Pinnacle participates in the low-to-moderate volume/high-mix segment of the EMS industry.
“The addition of Pinnacle significantly increases the size of LaBarge’s contract electronics manufacturing business, expands our customer base and provides LaBarge a greater presence in commercial industrial markets,” stated Craig LaBarge, company CEO and president.
“Pinnacle’s proven know-how in the commercial industrial EMS sector complements LaBarge’s expertise in the military and government sectors,” he said. “We are very excited about the business synergies between the two entities and believe LaBarge’s broader capabilities provide opportunities to grow the Pinnacle customer base. Additionally, we expect LaBarge’s purchasing power leverage to provide cost savings to the Pinnacle operation.”
The acquisition will further diversify LaBarge’s mix of business across a larger number of markets. “For example, with the addition of Pinnacle, we expect that the percentage of LaBarge’s total revenues attributable to defense shipments will be less in future quarters, not because of a decline in actual defense dollars in fact, we continue to expect that defense revenues will climb but because of the additional non-defense revenues that Pinnacle adds to our business mix,” said LaBarge during a conference call. Shipments to defense contractors represented 59% of LaBarge’s sales in its fiscal Q2 ended Dec. 28, 2003.
The acquisition will be immediately accretive to LaBarge’s earnings, according to the company. With the Pinnacle acquisition, LaBarge now expects that second-half results for fiscal 2004 will exceed first-half levels. Current guidance calls for sales of about $30 million in fiscal Q3 and about $38 million in fiscal Q4. The expectation for EPS is about $0.10 in Q3 and about $0.12 in Q4.
LaBarge expects Pinnacle’s management and employees to stay with the Pittsburgh operation, except for the current president who is retiring. The operation will be managed by VP and GM Teresa Huber, who formerly served as COO of Pinnacle.
For an EMS provider, Pinnacle is unusual in that it recently acquired a point-of-sale products business (Dec. 2003, p. 7).
With a history spanning more than 100 years, Pinnacle was owned by Main Street Capital Holdings and members of management.
CDR Adds Assets in Kentucky
CDR Manufacturing, a contract manufacturer based in Kentucky, has expanded its operations in that state by acquiring assets of TCA, a CM in Williamsburg, KY. Privately held CDR bought the assets, basically equipment and a limited amount of inventory, from a lender group that had taken possession of TCA’s assets. CDR will occupy the existing 40,000-ft2 facility in Williamsburg.
The acquisition gives CDR its third facility in Kentucky. The company’s other plants are in Harrodsburg, CDR’s headquarters, and Somerset. These two facilities total 40,000 ft2. In addition, a wholly owned subsidiary, Ayrshire Electronics, offers EMS in Fayetteville, AR. CDR acquired the Ayrshire operation in 2001 from Baldwin Piano & Organ.
“This acquisition presented a great opportunity for CDR. It was an opportunistic transaction much like Baldwin,” said Brian Porter, CDR’s VP of Finance and Ayrshire’s CFO.
“With the three locations in Kentucky and the growth opportunities we are seeing, these facilities will provide us the flexibility to place certain types of business in the site offering the greatest efficiency,” he added.
CDR plans to present the Williamsburg operation as its domestic low-cost solution. In addition, the operation offers wire assembly and termination capabilities that CDR did not have.
In business for some 20 years, TCA established itself as a supplier to IBM and later Lexmark in Lexington, KY. Half of TCA’s business was in EMS, and half came from electromechanical assembly.
CDR believes that this asset purchase will enhance the company’s status in the EMS industry. “With the next acquisition, we hope to get into the top 50,” said Porter.
Another deal done…Flextronics (Singapore) has completed its acquisition of Microcell Group, a mobile-phone ODM in GSM, GPRS and EDGE technologies (Aug. 2003, p. 1-2).
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New programs…Meriton Networks (Ottawa, Canada), a provider of carrier-class wavelength networking systems, has selected Sanmina-SCI (San Jose, CA) as its engineering and manufacturing partner. Sanmina-SCI will provide end-to-end services from optical design engineering to fabrication, assembly and chassis integration and test….During the December 2003 quarter, Plexus (Neenah, WI) won eight manufacturing programs from OEMs including Advanced Energy, AMX, Respironics, Telular and ViVOtech. More recently, Plexus landed a contract with Patientline PLC (Slough, Berkshire, UK) to manufacture and install the Patientline bedside multimedia and entertainment system. The contract gives Plexus sole manufacturing rights over two years and covers the entire UK. Plexus will also manage the complete supply chain from component sourcing to warehousing, logistics, installation and repairs. The two companies have had a relationship for eight years….PEMSTAR (Rochester, MN) started work with 15 new customers in the December quarter. Among them is ATMI (Danbury, CT), a supplier of materials and materials packaging to the semiconductor industry. PEMSTAR also began more than 52 new projects with existing customers in the December quarter. For example, the provider started another new project for Ciena (Linthicum, MD)….Three-Five Systems (TFS of Tempe, AZ) will manufacture and test PCB products for multiple locations of Kontron (Eching, Germany), a producer of embedded computer technology. Also, Brillian (Tempe, AZ), a spin-off from TFS, has chosen TFS to provide PCB assembly for Brillian’s 720p and 1080p HDTVs. PCB assembly will take place at TFS’s Penang, Malaysia facility, acquired last year….Perten Instruments (Stockholm, Sweden) has outsourced all of its production to PartnerTech (Malmö, Sweden). Perten specializes in quality control instruments for feed, food, flour and grain. The agreement is initially worth SEK 30-50 million a year to PartnerTech. Its plant in Åtvidaberg, Sweden, will handle production. Logistics and product development are also included in the partnership. In addition, PartnerTech will immediately start to manufacture base station components for a global telecom equipment maker in a program that will add some SEK 100 million to the provider’s 2004 revenue. Production, including both electronic and mechanical assembly, is slated for Poland….BAE Systems has contracted the UK’s TT ems Ltd to manufacture electrical components and advanced flexi-boards used within a missile guidance system for a new anti-tank weapon to be used by the UK’s Armed Forces. The work will be done at the TT ems operation in Rogerstone, South Wales. Reportedly, TT ems has also won a program to produce subassemblies for radios supplied under the UK Ministry of Defence’s Bowman program for voice and data communications (Dec. 2003, p. 6). TT ems is a subsidiary of TT electronics Plc, a global electronics manufacturing company….Winland Electronics (Mankato, MN) has received purchase orders from Dane Industries (Plymouth, MN) to design and manufacture board assemblies for Dane’s power assist equipment. Dane is a new customer for Winland.
New alliances…Endicott Interconnect Technologies (EI of Endicott, NY) and ENSCO (Falls Church, VA) have teamed up to bring ENSCO’s explosive detection system to government and commercial markets worldwide. Utilizing fixed x-ray sources and detectors, the system is designed to process airport baggage at high throughputs. ENSCO will lead the technology and development aspects of the project, and EI will provide development, production and value engineering capabilities. The alliance covers homeland security initiatives, of which this project is the first. Created from IBM Endicott operations in 2002, EI supplies interconnect solutions and electromechanical equipment. ENSCO provides engineering, science and advanced technology solutions to defense, security, transportation and other industries….New Venture Research (NVR of Nevada City, CA), a US market research and business development firm, and E.J. McKay & Co. (Shanghai, China), a corporate strategy and M&A advisory group, have formed a joint venture to assist OEMs and EMS providers in developing China solutions. The two firms are bringing together their skills and resources to assist companies in identifying Chinese partners and acquisition targets and facilitating joint ventures. E.J. McKay, which specializes in China-related transactions, is using its partnership with NVR to achieve more visibility and reach in the US market.
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Celestica CEO Resigns
Last month, Eugene Polistuk unexpectedly resigned from his position as chairman and CEO of Celestica (Toronto, Canada). He informed Celestica’s board of his decision to retire, effective immediately. The announcement was made without any prior disclosure.
“I believe the ‘tech storm’ is over, and Celestica is very well positioned to share in the outsourcing trend that is gaining considerable momentum as end markets show positive signs of recovery,” stated Polistuk. “At this juncture, I feel it is time for me to pass the leadership of Celestica on to new and very capable hands so that I may refocus my priorities on family and personal interests.”
The board has established a search committee to find a replacement for Polistuk. According to Celestica, candidates from both within and outside the company will be considered. The board has appointed Stephen Delaney as interim CEO. He joined Celestica in 2001 and most recently served as president, Americas operations. Before coming to Celestica, Delaney was VP and GM of Interior and Exterior Business at Visteon Automotive Systems, where he oversaw a division with 25 plants and 25,000 employees. Earlier, he held executive and senior management roles in the operations of AlliedSignal’s Electronic Systems business, Ford’s Electronics division and IBM’s telecom division.
Delaney plans on holding the CEO job permanently. In a January conference call, he told analysts, “I’m intending on being in that position in the end.”
The board’s choice of Delaney was somewhat surprising in that he was not the most senior executive who could have been selected.
Robert Crandall, who has been a director of Celestica since 1998, has been named chairman of the board. He is the retired chairman of the board and CEO of AMR Corporation/American Airlines.
Polistuk led the company since 1994, when it was set up as a stand-alone subsidiary of IBM. Celestica was acquired by Onex in 1996 and went public in 1998. Under Polistuk’s stewardship, Celestica became a global tier-one provider in the EMS industry.
Some financial news…Solectron has offered $450 million of convertible senior notes with an annual interest rate of 0.5%. The company plans to use the net proceeds to repurchase and repay certain of its unsubordinated debt….SMTC (Toronto, Canada) has announced three pending transactions to refinance the company. SMTC has a commitment for a private placement of CAD$40 million (about $30 million) of equity securities, has obtained a letter of intent for a $40-million credit facility, and has struck an agreement with its lenders. Under this agreement, SMTC will repay $40 million of debt at par, exchange $10 million of debt for $10 million of common stock and warrants, and convert up to $27.5 million of debt into subordinated debt with maturity ranging from four to five years. Through this refinancing, SMTC intends to lower its indebtedness by about $37 million, extend the term of the majority of the remaining debt, and provide additional liquidity. These transactions are subject to shareholder approval and other customary conditions. Refinancing is part of SMTC’s turnaround plan….Fabrinet (Bangkok, Thailand) has secured a new credit facility from the Bank of Nova Scotia for new equipment. Also, International Finance Corporation, the private sector arm of the World Bank Group, has agreed to open a credit facility in Thailand for Fabrinet.
Correction for the record… In the November 2003 table of Q3 results (p. 7), Three-Five Systems was listed with net income of $30.9 million, which was in error. The company actually reported a net loss of $30.9 million for Q3 2003. As a result, the total net income shown for 11 smaller providers in Q3 was incorrect. As a whole, this group actually produced a net loss of $29.7 million in Q3.