The industry has been buzzing this past month as more big deals have been inked and others hover in limbo, the subject of rumor. Some of theses deals have been mergers or acquisitions between well-known industry names, like Flextronics and Solectron; Mentor Graphics and Sierra Design Automation; Rena and Höllmüller.
Other deals made or under discussion involve private equity firms buying some or all a business’s assets. Not since the tech stock crash and subsequent manufacturing downturn has our oft-ignored industry generated so much interest. Why all the attention now?
A number of factors are contributing to the recent attractiveness of electronics companies, including the fact that most sectors continue to deliver small but relatively stable increases year-on-year. After the 2001-03 shakeup, many of the larger survivors took Lean manufacturing and aggressive product mix strategies to heart. These have kept them profitable and flexible when it comes to handling margin pressures.
This is seen not only in the U.S. but elsewhere. The largest PCB companies in Japan and Taiwan offer an excellent example of how companies can use product mix management to maintain healthy margins. In Japan, volumes have been on the decline over the past few years, but company profits are rising, in part due to increased production of HDI circuits, interposers and other higher-margin packaging platforms.
In Taiwan, some of the larger electronic interconnect manufacturers have diversified into semiconductors and packaging. A few now seem poised to enter the thin-film alternative energies (read: solar and fuel cell) market, leveraging their experiences with flexible laminates, imaging and silicon technologies. While the logic of this type of horizontal integration may seem questionable, the potential for higher-margin products and the explosive growth predicted in the thin-film energy market catches the attention of many margin-squeezed PCB makers.
The Rena-Höllmüller merger announcement in June further fuels the solar fires, so to speak. Joe Kresky managing director of Höllmüller, told me he thinks it’s a win-win for each market – PCB and solar. “The profit margins have melted down (in PCB) due to expensive resources, a depreciated dollar and customers not willing to pay more even though the conditions dictate it,” Kresky said. “It has turned into a tough market if you do not have niche products.”
But there’s hope in energy, Kresky says. “The solar market is expanding strongly, with a 30% growth rate, according to respected sources,” he said. Kresky summarized the acquisition as not about cutting costs, but about creating sustained, profitable growth for both companies that will permit the opportunity to advance the technologies for these industries and expand their product offerings.
So what about the private equity deals, the new money if you will, flooding the industry? How does that fit into the electronics industry’s long-term growth strategies?
The question on the minds of many is what these private investors will do with the companies they invest in. Is it possible that companies, flush with new funds, will have the opportunity to increase R&D expenditures or upgrade technology? Or will the investors bring a slash-and-burn ideology, an interest in milking the cash cow just as long as it’s producing?
What will ultimately happen depends heavily on the specific investor’s strategy. In a deal that closed in April, the private equity firms of Court Square Capital and Weston Presidio along with company chairman and CEO Dan Leever bought MacDermid. Stockholders received a cash settlement of $35 per share. It’s a bit early to say what direction this one will ultimately take, but in this case, with Leever’s continued involvement in day- to-day operations, there is a good chance there will be minimal change.
And in June, many have become caught up in the rumors of the potential buyout of Cadence Design Systems by private equity players Kohlberg Kravis Roberts (KKR) and the Blackstone Group, based on a New York Times article. Since a week after the initial story no one in-the-know is talking, we are left to ponder what effect, if any, this would have.
Whether real or just talk, all this M&A activity in the PCB and electronics industry has focused “The Street” on our industry. In many ways, that isn’t such as bad thing. We could use the infusion of interest and the potential capitalization to upgrade our capabilities, especially in the U.S. fabrication base.
We in the fabrication industry have for years been overlooked and often shunned. It was hard, even for large companies with good growth prospects, to get money. This old view seems to be turning the corner. I suggest we take our few minutes in the spotlight to remind forecasters and potential investment partners that the electronics industry does have a sound long-term investment value.
