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M&A to Accelerate in EMS/ODM Market

With the growth of electronics end markets slowing and companies flush with cash, outsourced manufacturing firms are set to accelerate their merger-and-acquisition activity during the next one to three years, according to IHS.

Following a relatively quiet period over the past several years, conditions appear to be ripe for industry consolidation in the electronics contract manufacturing business. For one, organic growth is starting to slow for a number of markets, prompting companies to turn to acquisitions to generate growth. Meanwhile, the leading outsourced manufacturers have long since concluded their footprint rationalization efforts, ridding themselves of excess manufacturing capacity and prompting them to consider ways to add new production resources. Furthermore, major contract manufacturers are reporting relatively healthy finances with improved net-cash flow, while small-to-midsized providers have recovered from the depths of the downturn of 2008 and 2009.

In the electronic manufacturing services (EMS) space, five of the top 10 companies reported improved net-cash positions in the first quarter of 2011 compared to the fourth quarter of 2010. All told, net cash for the largest EMS providers during the period amounted to a combined deficit of slightly more than $500 million, excluding Hon Hai Precision Industry Co., the world’s largest contract manufacturer, which has been aggressively adding capital to support its rapid growth. The deficit was down a sizable 46 percent from the much larger collective loss of $1.09 billion in the fourth quarter of 2010.

If Hon Hai is added to the mix, the overall deficit would have stood at $3.1 billion in the first quarter, down just 6 percent from $3.3 billion in the fourth quarter of 2010.

Within the EMS space, four companies — Celestica Inc., Benchmark Electronics Inc., Venture Corp., and Plexus Corp. — had positive cash positions, with more cash than debt on hand. An equal number of firms — Flextronics International, Jabil Circuit, Sanmina-SCI Corp., and Cal-Comp Electronics — saw their deficits narrow. This indicates a lessening of debt, as improved profitability as well as more cash flow has yielded improved earnings and better capital management.

A similar positive dynamic exists in the original design manufacturing (ODM) sector, with most of the top companies showing an overall improvement in net cash and a reduction of debt. However, like the EMS sector, the ODM sphere has one company with outsized influence: Hon Hai affiliate Chi Mei Innolux, whose big deficit position, if included, tilts the whole ODM space much more into negative territory.

More M&A activity is expected in the contract manufacturing market. Already, a number of divestments have occurred as several high-profile manufacturers have shed their assets to EMS and ODM providers. For instance, {complink 1131|Cisco Systems Inc.} sold its assembly facility in Juarez, Mexico, to Hon Hai as part of a restructuring effort aimed at saving $1 billion this year.

{complink 5648|Toshiba Corp.}, facing a challenging profit environment in its liquid crystal display television (LCD TV) business, also has decided to sell its Mexico LCD TV assembly operation to {complink 1259|Compal Electronics Inc.} A third manufacturer, {complink 987|Celestica Inc.}, just completed its acquisition of the EMS operations of Brooks Automation Inc.

Given that organic growth is slowing across major end markets, acquisitions can allow companies to expand, IHS believes. Acquisitions can be viewed as a positive development, demonstrating that the industry has adequate capital and sufficient need for capacity expansion in order to undertake additional assets. And unlike the past, where activities were done at sizeable premiums to net asset value, the acquisitions this time are priced more reasonably.

Only time will tell whether these deals — and the prices paid for the acquisitions — represent decent value for the business. The acquisitions, however, will create solid opportunities throughout the contract manufacturing industry, especially as buyers are able to successfully leverage their newly acquired assets and expanded customer bases into growth.

— Thomas Dinges is the EMS and ODM analyst at IHS. For more information on the contract manufacturing market, look for the upcoming IHS report: EMS and ODM Merger and Acquisition Activity Starting to Increase: Is This the Beginning of Something Big? For media inquiries on this report, contact Jonathan Cassell, editorial director and manager of public relations, at jonathan.casell@ihs.com. For non-media inquiries, please contact .

4 comments on “M&A to Accelerate in EMS/ODM Market

  1. Taimoor Zubar
    August 26, 2011

    Interesting post, Thomas. I agree that mergers and acquisitions are important for companies to raise more capital and increase their scale of operations. Comparing between mergers and acquisitions, which of these do you think is is more beneficial for electronic companies?

  2. bolaji ojo
    August 27, 2011

    Thomas, The analysis is spot on but although you identified the companies that might be the acquirer you did not address the potential acquisition targets. I assume companies such as Hon Hai, Flextronics, etc., would be doing the acquisition. Which size of companies do you see them seeking to purchase and do you expect this to be regionally driven?

  3. Anna Young
    August 27, 2011

    @TaimoorZ, I assume it's a matter of size and resources. In the case of acquisitions, the buyer would supposedly pay a fat premium to get the seller but with mergers things get a bit more complicated. A merger (of equals if there's such a thing) would mean both parties see compelling benefits for pooling resources, including the opportunity to cut costs, leverage marketing and sales and reduce capital costs. 

    In the contract manufacturing market, my feeling is that the goal would be to add a rival's existing customers during a market lull. This would serve the same goal of helping to cut costs, boost productivity and get profit growing. It would depend on the companies although I would in this market go for a direct acquisition rather than a merger. This way, the buyer gets the immediate identified costs, pays upfront and avoid protracted and distracting negotiations that normally are integral to mergers.

  4. Taimoor Zubar
    August 27, 2011

    @Anna, I think it also depends on the nature of the companies. In the case of mergers, since companies have to work together, the compatibility amongst them and the ability to work together also matters a lot I guess.

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