Buyout Seen As Profit Defense — Flextronics to Buy Rival Solectron Amid Market Competition

By Jordan Robertson Associated Press

SAN JOSE, Calif. – Flextronics International Ltd., the world’s No. 2 contract electronics maker, is buying smaller rival Solectron Corp. for $3.6 billion in cash and stock, in a takeover that analysts say is fueled by fierce global competition that is driving down prices and squeezing already razor-thin profit margins.

Singapore-based Flextronics said Monday that Solectron investors will have two options for converting their shares, either a cash payment of $3.89 per share, a 15 percent premium over Friday’s closing price of $3.37 on the New York Stock Exchange, or 0.3450 shares of Flextronics for each Solectron share, which is a 20 percent premium.

No less than 50 percent and no more than 70 percent of Solectron’s stock will be converted into Flextronics stock, the companies said in a joint statement before the markets opened.

Flextronics said it expects to identify some $200 million in cost- savings from the acquisition, which will boost earnings per share by about 15 percent once the two companies are fully integrated, which could take up to two years.

Solectron will get to nominate two people – who need to be approved by Flextronics – to the board of directors of the combined company.

The acquisition is expected to close by the end of this calendar year.

News of the takeover sent shares of Milpitas-based Solectron surging 51 cents, or more than 15 percent, to close at $3.88. Flextronics shares fell 16 cents, or just over 1 percent, to close at $11.54 on the Nasdaq Stock Market.

Both companies make a variety of electronic devices for companies looking to cut costs by outsourcing some of their manufacturing duties. Their client lists include a who’s who of technology giants from Cisco Systems Inc. to Hewlett-Packard Co. and Motorola Inc. and IBM Corp.

Some of Flextronics’ products include cell phone handsets, switches and routers for directing data over corporate networks, and Microsoft Corp.’s Xbox videogame console. Solectron’s product lineup includes consumer set-top boxes, MP3 players, as well as navigation systems for cars and medical instruments.

The combined company will have more than $30 billion in annual sales, which analysts said will help Flextronics close the gap with Taiwan-based Hon Hai Precision Industry Co., which still holds a commanding lead as the world’s largest contract electronics manufacturer. The combined company will have about 200,000 workers in 35 countries.

Analysts said the entire industry is grappling with finding ways to boost profits while competing in a crowded and fractious marketplace.

The top five companies – Hon Hai, Flextronics, Taiwan-based Quanta Computer Inc. and Asustek Computer Inc., and Solectron – command only about a quarter of the overall contract electronics manufacturing market, allowing companies to shop around and drive down prices, according to Al Velosa, an analyst at market researcher Gartner Inc.

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