Flextronics to Bulk Up With Solectron Buy

Flextronics International is set to buy rival electronics manufacturerSolectron for US$3.6 billion in cash and stock in a move to cut costs and expand its product line.

The smaller Milpitas, Calif.-based Solectron will become a subsidiary of Flextronics in a merger that will create a single contract electronics manufacturing company with more than $30 billion in annual revenue and a workforce of about 200,000, including about 4,000 design engineers.

Increasing the Bottom Line

Singapore-based Flextronics — which makes mobile phones for Sony Ericsson, the Xbox 360 game console for Microsoft, and many other products for some of the world’s largest companies — expects the deal to boost Flextronics’s earnings per share by at least 15 percent.

Solectron focuses on design, supply chain management and product warranty repair services to companies serving the networking, telecom, computing, storage, automotive, medical and defense industries. Flextronics’ planned acquisition would vastly expand its product range, adding contracts with Cisco, Sun Microsystems and IBM.

Flextronics chief executive Mike McNamara said the deal will give Flextronics increased scale to extend its market reach and save on costs.

“The combined company will be a market leader in most product market segments,” he said.

Flextronics other customers include Casio, Dell, Eastman Kodak, Ericsson, Hewlett-Packard, Motorola, Nortel Networks, Sony-Ericsson and Xerox.

Reducing Costs, Increasing Profits

The combined companies will generate at least $200 million in after-tax cost savings in 18 to 24 months after the transaction is completed, according to the company.

The timing of the deal is fortunate for Solectron, which reported in late March a drop of almost 50 percent in quarterly net profits and said it would begin cutting jobs and plant space.

The buyout is expected to be completed by the end of the year with the approval of shareholders and regulators.

Competition Heating Up

The deal comes as competition in the contract industry continues to heat up, with Asian rivals including Taiwan’s Hon Hai Precision and other companies squeezing already tight margins, according to Rob Enderle, principal analyst for the Enderle Group.

The deal now provides both companies with the ability to scale a lot of their resources rather than competing with each other, Enderle told the E-Commerce Times, adding that they will likely consolidate common services such as accounting and sales to further cut costs.

The deal should combine Solectron’s strength in high-end computing, telecommunications and network infrastructure with Flextronics’ expertise in high-volume, low-cost products, Enderle noted.