No cutters or hackers need apply.
If you were active in the PCB industry when the Back to the Future movies were popular, you may remember when circuit board fabrication was a hot industry. By hot, I mean investors were trying any which way they could to cobble their dollars (or other currencies) to invest in then-startup companies in a growing industry.
This investment euphoria continued through the 1990s.
Then came refinements to this strategy. Rather than spend on startups, a guy named Mills demonstrated that by merging larger established companies, one could ramp up faster and larger. He did so, and in the process created what became Viasystems. Viasystems had an insatiable appetite, feasting on what appeared to be every board shop it could find and rolling them up into one of the largest fabricators in the world.
In late 2001 this phenomenon came to a violent halt. The combination of the dot-com bubble bursting, resulting in significant excess capacity, and the emergence of Asia as the preferred low-cost manufacturing destination for electronics of all kinds cooled off the North American industry. And oh did it cool off! The North American industry began to resemble an iceberg in spring, with frozen splintering pieces falling off, lost in an ocean of obscurity.
Investment activity has shifted notably toward Asia, in particular China, where greenfield facilities have sprung like weeds, and the capacity and capability – all at significantly lower cost – have created an investment exodus from North America and Europe to the promised land of low-cost Asia. What investors – and money – remained in the West focused during this ensuing time on the EMS market, with lucrative and strategic deals reshaping that segment of our industry. More recently, the supply base has been in the financial news, as consolidation takes place at laminate and chemical suppliers.
While most have become accustomed to mega deals in which Tier 1 or Tier 2 companies merge, it appeared the days where investors were interested in smaller companies had passed, leaving most Western fabricators with few options other than liquidate when the owner(s) decided to pack it in.
Things are possibly changing, however. The press buzz indicates maybe, just maybe, some are beginning to realize there is value in the remaining PCB fabricators, and hope for those long-suffering “survivors” that the future may finally be brighter than the past.
Over the past year, private equity folks have been quietly buying smaller specialty fabricators. While this has happened in the past, this time it is a bit different. The companies being acquired are solid, smaller niche players. More important, the demonstrated intent by these boutique investors is not to recoup their investment by liquidating the assets and then broker product from overseas to supply the acquired customer list. Rather, these buyers are hiring seasoned managers, investing money in technology and equipment so the companies can further secure their technology niche, and are committing to running true operating (manufacturing) enterprises.
It is too soon to know whether the end game is to acquire a small base of companies and then roll up additional companies into a mega shop vis-à-vis Viasystems in the late ’90s. It does appear, however, these investors have identified a value proposition – a proposition that values solid niche capability, a loyal customer base, and a recognized reputation as a quality company. When viewed in its entirety, businesses of any size with these characteristics make for the type of value worth investing in.
Now, before everyone breaks out the hats and horns, places “For Sale” signs on their buildings and starts calling investment advisors in anticipation of an impending windfall, remember this is not the 1990s! The industry today has its share of fine, high-value enterprises, but it also has more than a few clunkers and a whole slew of companies that require more than a little TLC before they could – under the best conditions – command a premium price. No, the good news is that it appears the North American PCB industry may have bottomed out. The not-so-good news is we all need to focus on making sure our businesses provide the value proposition that our customers value – and yes, potential investors value as well.
And creating value, true value is still what it is all about. Cutting and hacking your way to success just won’t cut it. Investing in people, skills, capability, equipment and all that it takes to provide true value to customers is more important now than ever. Companies that excel at providing value will not only earn a solid reputation with customers, who in turn will become loyal clients, but they will also earn a reputation in the industry at-large that will attract potential investors to enable greater investment and growth, or just provide a reasonable exit strategy for longtime owners.
Increased M&A activity sends a couple additional, albeit subtle messages throughout the industry. First, there is indeed demand for the remaining capacity in North America – and maybe that capacity is worth a premium. (That’s important to note, especially when quoting customers.) Second, North American fabricators – especially smaller ones – offer advanced technology and/or specialty capabilities customers are looking for. (Again, important to note, especially when some snarky buyer tries to browbeat their suppliers out of ignorance.)
Maybe we are heading back to the future. It would be great for all to be part of an industry renaissance, especially now with the head-earned wisdom that came from experiencing all that transpired since the heady days of the last millennium.
is president and CEO of IMI;