Ducks in a row due diligence and EMS provider mergers / acquisitions with Jack Calderon

As the world becomes smaller and it is easier for companies (or any individual person for that matter) to locate or source products and services from almost anywhere on the planet, it's no surprise the electronics manufacturing services (EMS) industry has become so hyper-competitive as companies continue to find it increasingly difficult to position or differentiate their offerings.

In a truly free market, more and more EMS companies, both global and regional players, are realizing that EMS is not an easy business model. Flextronics' acquisition of Solectron, followed by Flextronics' transition to become an even more formidable player in industry, is surely not the last major acquisition we will see.

VentureOutsource.com talks with Jack Calderon, a managing director with global investment bank Lincoln International (www.lincolninternational.com), on merger and acquisition due diligence for the EMS sector.

Read what Mr. Calderon has to say about ways EMS company executives can help improve their chances of success in mergers and acquisitions, developing a due diligence ‘to do' list, why some industry marriages fail and more. Transcripts from that discussion follow.

VentureOutsource.com: Many electronics manufacturing services (EMS) companies are finding difficulty establishing a sustainable business model in today's market. As a result, electronics contract manufacturing executives are either forced to downsize to a more manageable business model or, they are changing their business dynamics through merger and acquisition strategy or, worse yet, they are closing their doors completely. Nowhere is this scenario playing out more than in the micro or Tier-4 level (revenues less than US$150 million). What are your thoughts on the long-term viability of companies in this group? Which industry technological capabilities do you see serving this group the best? Which end-market sectors do you see being catered to more effectively by smaller EMS providers than their much larger counterparts?

Calderon: The EMS business is foremost a service business. Most service industries began by offering a particular skill set. The proficiency in delivering the skill set was the early differentiator between competitors. As the industry matures certain companies achieve scale and can service larger, more complex accounts on a global basis.

Jack Calderon
Managing Director
Lincoln International

Other entities thrive by either providing a highly specialized niche service, or keeping size and overhead purposely low to service small accounts who need a high level of care but would not be able to afford the services of or receive the necessary care from large global providers.

These words apply to most service industries from accounting, legal services and even landscaping. In the accounting world for example there are several large global firms whose business models are best suited for large institutions, however, numerous firms thrive servicing smaller accounts.

As the EMS market continues to mature it too will be characterized by a few major global firms, highly specialized firms, and numerous small shops providing "high touch" service to small accounts.

The key is to pick a strategy and focus resources to execute the strategy. Firms seeking a specialty strategy may find that by focusing on unique end markets like aerospace or medical, or around a capability like ruggedization or miniaturization they can achieve a high level of profitability. Smaller firms seeking more general strategies need to focus on account size, rapid response, and regionality.

VentureOutsource.com: It is widely known many mergers and acquisitions (in general) simply fail to produce the results either side thought would materialize when sitting across the table from one another at the onset of discussions. The road to successful M&As is littered with company carcasses scattered about by the sometimes blind ambition of overzealous investors or executive boards.

Meanwhile, there are numerous ways investors and executives can mitigate risks associated with mergers and acquisitions.

Figure 1: Merger & Acquisition Success

In Figure 1, the Merger & Acquisition Success chart illustrates the chances for success based on whether or not the buyer is acquiring a company with a technology that matches his own, or has technology that is an extension of his own or, has a completely new technology. The same can be applied when looking along the above chart's ‘x' axis...when evaluating the market the company to be acquired plays in. What two (2) factors do you see contributing to some of the biggest failures in merger or acquisition transactions? What are your thoughts on the above chart?

Calderon: The two biggest failures in realizing success from acquisitions are:

poor acquisition selection
lack of planning prior to closing the transaction

Too many buyers and their investment banking advisors rush to the numbers too quickly in an acquisition process.

More importantly, understand what you are looking for and be able to know it when you see it.

One successful acquisition I was privileged to serve as the investment banking advisor on was CTS' acquisition of SMTEK in 2005. Working with CTS' executive staff we identified the key characteristics of the desired target. These characteristics for the most part had to do with people, engineering capability, end markets and customers.

Average rating

(1 vote)