EMS mergers and acquisitions for Q3 2007

Q3 2007 Summary There were 12 completed electronics manufacturing services (EMS) transactions in Q3 2007, the lowest total since Q4 2006. As displayed in Chart A, the 12 transactions were three fewer than the number recorded in the previous quarter, and two fewer than recorded one year ago. As shown in Chart B, EMS consolidations represented two transactions, or 17% of total activity in Q3 2007, down from seven transactions in Q2 2007. There were two OEM divestitures in Q3 2007 compared to zero in Q2 2007. Accordingly, as a percentage of total transactions, OEM divestitures were 17% in Q3 2007 compared to 0% in Q2 2007. Vertical/horizontal convergences were the same, at five transactions in both Q2 and Q3 2007, 42% of total transactions. There were also two EMS divestitures announced in Q3 2007, 17% of total transactions, up one from one reported in Q2 2007. In addition, there was one Private Equity Investment in Q3 2007. As illustrated in Chart C, three of the deals in Q3 2007 were cross-border; the same number as were completed in the previous quarter. Within this category all three were transactions between high and low cost geographies. For Q3 2007, four transactions occurred within the U.S. / Canada region compared to seven transactions in Q2 2007. Two of the closed transactions in Q3 2007 occurred within Western Europe (17% of total) and three were reported from within Asia, compared to four and one, respectively, in Q2 2007.

Note: ‘High / High' indicates cross-border transactions between Japan, Taiwan, Western Europe and U.S. / Canada. ‘High / Low' indicates transactions between high-cost regions and low-cost regions.

As shown in Chart D, below, transactions by size for the quarter were led by the small group, Tier III, totaling five, or approximately 42%, of all transactions. There were four transactions (33% of total) in the Mid Tier. Micro Tier EMS providers closed three transactions. There were no transactions closed by the largest tier of companies where Lincoln International categorizes EMS providers into the following sizes relative to revenues:

• Tier I (Large) Greater than $3 billion
• Tier II (Mid) $400 million to $3 billion
• Tier III (Small) $100 million to $400 million
• Tier IV (Micro) Below $100 million

Boom or bust: An analysis of growth trends affecting the EMS industry Financially, EMS companies performed better in 2006 than in any other year in EMS history. In the first half of 2007, the 21 largest publicly traded EMS providers in the world produced a sales increase of 16.3% versus the year-earlier period. The nine largest publicly traded EMS companies in the U.S. are estimated to grow 8.1% in Q3 2007 as the outsourcing of electronics manufacturing to EMS providers continues. The growth outlook for the EMS industry continues to be geographically unbalanced. According to Electronic Trend Publications, from 2006 to 2011, Asia is expected to grow at a CAGR of 19.3% and account for over 66% of the EMS market by 2011, as compared to 7.6% annual growth for North America and 8.1% annual growth for Europe. The rest of the world is expected to grow at a 9.8% CAGR over the same period. In past years, the main driver of growth in Asia was the trend to move from high to low-cost regions. This shift is waning as labor cost differentials are diminishing against the total cost of production (including transportation and logistical challenges). Offshore product migration is expected to continue, but at a more moderate pace. The Chinese government continues to provide significant incentives with regard to tax credits, trade zones, and an overall "hands-off" attitude that encourages M&A and private ownership. Total private ownership of EMS operations is now possible and private property ownership is beginning to make inroads. As shown in Chart E, overall EMS revenue during the last 12 months (LTM) grew at a slower rate than in Calendar Year (CY) 2006. Large EMS providers grew 10.8% on an LTM2007 basis versus 12.7% in CY2006. After three straight years of robust growth for the Mid Tier, LTM2007 revenue only grew at 2.0% versus CY2006 growth of 17.9%. Small Tier EMS company LTM2007 revenues grew 2.4% versus 12.9% in CY2006. Although Micro Tier providers grew at a very strong 25.3% in LTM2007, they still fell short of their CY2006 performance of 49.6%. Longer term growth in the EMS industry will continue to be driven by end markets. In regards to long term growth, communications continues to be the end market that offers the most significant upside potential. This end market is expected to grow at a CAGR of 21.0% from 2006 to 2011. The medical sector is also expected to show strong growth with forecasts showing a CAGR of 14.1% over the next five years. Also showing double digit growth is the computer industry with an expected CAGR of 12.1% through 2011. From 2006 to 2011, the annual growth rates for the consumer, defense and industrial end markets are expected to be between 8% and 10% and the automotive sector is expected to grow 6.6% annually. Overall, the global EMS market is expected to grow 14.7% annually from a $223 billion market in 2006 to a $442 billion market in 2011. Growth prospects in the EMS industry remain positive over the long term. Overall, growth rates look positive although, between size tiers, growth will continue to vary as differences in end markets and customers occur. We also anticipate further consolidation activity as EMS companies seek to expand globally or to dominate certain domestic niches. In addition, we believe there will continue to be significant investments made by financial buyers. Source: Lincoln International