Contract electronics manufacturer Flextronics today said it is acquiring rival Solectron for $3.6 billion in cash plus stock.
According to Flextronics, each Solectron share will be converted into the right to receive either 0.3450 Flextronics shares or $3.89 cash, subject to certain conditions.
The cash consideration represents a premium of 15 percent over Solectron’s closing stock price Friday, while the stock consideration represents a premium of about 20 percent.
Following the acquisition, Solectron will become a wholly owned unit of Flextronics, and Solectron shareholders will own 20 percent to 26 percent of Flextronics’ outstanding shares.
The combined company will have a work force of about 200,000, including about 4,000 design engineers with a combined annual revenue exceeding $30 billion.
Flextronics said the combined organization could cut costs by up to $200 million, although it could take as much as 24 months to integrate the two companies.
As part of the acquisition agreement, Solectron has the right to nominate two individuals, approved by Flextronics, to the board of directors of the combined company.
Investment bank Bear Stearns & Co. analyst Kevin Kessel believes the acquisition will increase Flextronics’ exposure to the telecommunications end-market (from 23% to 30% of total sales) and high-end computing sector (from 10% to 19%) while reducing the company’s handset exposure (from 31% to 19%).
As a result, Flextronics will gain significant exposure to Cisco, IBM, Alcatel Lucent, as well as HP’s servers.
Many believe the acquisition will be a positive for the sector and help rationalize the industry’s over capacity issue which could lead to better pricing.
Bear Stearns’ Kessel also believes the deal could push other industry companies to consolidate or else risk being left behind.
Deutsche Bank analyst Carter Shoop believes the acquisition speaks volumes to the EMS industry’s difficult operating environment (excess capacity, aggressive pricing) and need for consolidation.
While shares of EMS companies Celestica and Sanmina-SCI both rose following the announcement, Shoop believes both of the latter companies remain largely unattractive acquisition targets but that a desperate merger of ‘equal companies’ in the industry remains possible.
In the end, the Flextronics-Solectron deal might lead to other, smaller electronics contract manufacturing companies having some success winning away small-sized OEMs that may otherwise be turned off by the soon-to-be massive size of Flextronics.
Additional perspectives: Wall Street Journal, BusinessWeek, Investor’s Business Daily
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