Large investors are optimistic about
( SLR) for $3.6 billion, stressing the ability of CEO Mike MacNamara to increase profit margins and give the company the heft it needs to compete with large Taiwanese rivals.
The deal combines Singapore-based Flextronics' broad manufacturing capabilities, which range from light emitting diodes to plastic Legos toys, with Solectron's capability to manufacture highly specialized telecom gear.
The companies have combined revenue of nearly $30 billion.
announcing the deal Monday, CEO MacNamara said he expects that adding Solectron will boost earnings per share by 15% within two years. The timeline is reasonable for shifting production from Solectron's facilities to Flextronics' sites, says Brian Barish, research director for Cambiar Investors, which holds Flextronics shares.
MacNamara was promoted from COO to chief executive in January 2006. Since then, he has helped the company add new clients like
( EK), for which Flextronics manufactures digital cameras.
The deal makes sense for Milpitas, Calif.-based Flextronics because the company can lift profit margins in line with its own, and even hit the 3.3% target that management has set, said Vasu Kasibhotla, an investment analyst with Trilogy Global Advisors, which holds Flextronics shares.
"Flextronics' management has been able to expand margins through cost cutting and other restructuring," said Kasibhotla. "We're confident they can do the same with Solectron as synergies kick in."
Few other companies have the scale and resources to achieve the margin growth that Flextronics promises, says Kasibhotla. For this reason, he doesn't expect rival bidders to step forward.
This transaction builds on the general industry trend toward integrated electronics manufacturing companies that operate as holding companies with various business units, giving them the ability to meet a range of customer needs.
Flextronics' plastics unit, for example, makes cases for cell phones; its electronics unit makes screens for the devices.
Its customers include
, a joint venture of
This style of "vertical integration" is attractive to clients such as Motorola and Ericsson that have diverse manufacturing requirements.
Also, the industry has suffered under excess capacity, leading companies to look for ways to consolidate. Acquiring Solectron leaves Flextronics and Taiwan-based
Hon Hai Precision Industry
as the two dominant players in the industry.
"This is close to a winner-take-all industry, and the deal makes sense for both companies on a lot of levels," says Brian Barish of Cambiar Investors.
Barish favors the deal because Flextronics, which also makes products for
, gains Solectron's manufacturing capacity for highly technical telecommunications equipment that it makes for
and other large tech companies.
Solectron, Barish says, had little choice but to find a buyer because it lacks the market share to compete and is struggling with narrow profit margins.
Flextronics' operating profit margins run at about 3% compared with roughly 1.5% for Solectron.
"This could be a really good deal not only because it can add $200 million in earnings that management is claiming," said Barish, "but it solidifies Flextronics' position in cell phone manufacturing as well as higher end communications equipment."
The potential fruits of the acquisition offer significant upside for Flextronics' investors. Barish says the management's promises for costs savings and profit growth could boost the stock price to $18 over the two-year integration period.
Flextronics' shares rebounded from an intraday low and were recently trading down 19 cents, or 1.6%, to $11.51. Solectron's shares rose 49 cents, or 14.5%, to $3.86.