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The question is not why Sanmina is buying Hadco, but what they'll keep (April 2000)
April 25, 2000 |Estimated reading time: 3 minutes
The question is not why Sanmina is buying Hadco but what they'll keep
By Harvey Miller
April 25, 2000
On April 17, 2000, Sanmina and Hadco announced their agreement to merge. Many people have questioned the rationale because of seemingly incongruent market characteristics and production styles. But stock market valuations often influence the course of acquisitions more than couplings based on other logic. Also, there is logic for merger based on comparison of the more mature and lower growth fabrication side (in which Hadco is number 1), to the high growth potential in the EMS sector (where Sanmina is the 2nd largest player that also has extensive PCB fabrication). Operational contrasts are many, but they may be resolved-by well-chosen divestitures, after the merger. The merger will be a win-win for the two main parties, maybe for some others.
The financial picture pre-merger announcement
- Valuations: Sanmina $7B, Hadco $1B
- P/Es: Sanmina 40, Hadco 28
- Number of shares: Sanmina 124M, Hadco 13.8M
It’s clear that the EMS company was an Investment Community’s favorite. The EMS Total Available Market may be over $500B worldwide, growing at 20% per year. Sanmina has grown at over 25%. The PCB market growth is relatively flat-about 8% per year. Semiconductors are increasing their share of assembly value as the often- predicted displacement of board area by silicon area is actually happening. Another factor impacting the U.S. fabrication market is overseas production exports. Dr. Nakahara estimates that at $2.5B on top of $9B domestic output in 1999. EMS companies meet this challenge by worldwide operations to a much greater extent than domestic PCB companies.
Their high valuation made a stock exchange easy for Sanmina.
Hadco stockholders will cash out tax free with Sanmina stock worth $71 per Hadco share. And some Hadco employees will probably be able to participate later in a resurrected “Hadco”.
Comparing operations
Sanmina’s
- Over $2B annual sales were gained by selectively picking high growth telecom and networking (79% of sales) OEM customers and by striving to meet their time-to-market needs with a full-service package, from bare boards to backplanes to box build
- Bare board production, mostly embedded in and sold as backplanes, are about $380M; two thirds due to 3 major acquisitions that accounted for 4 of 8 PCB fabrication facilities in Northern and Southern California, Massachusetts (that one also included an over $30M backplane facility), New Hampshire
- PCB facilities employ less than 400 people; the Massachusetts plant is an exception with more than twice that number.
- Production philosophy seems to be to use many small plants that can be securely dedicated to individual customers or optimized for particular board styles
- Move to Electronic Manufacturing Service status began a decade ago with purchase of a facility near the Sanmina HQ from a troubled EMS company. Since then there have been over ten acquisitions of OEM and EMS facilities, all successfully and profitably integrated Sanmina prefers to be classified as an EMS not a PCB company. Judging from the product mix, the company deserves that designation
Hadco’s
- Billion dollar annual sales are 45% to other EMS companies, such as Solectron, Celestica, and SCI. Communications leads with 44%, Computer is second with 30%.
- Assembly, mostly Backplane, has reached $150M, moving toward $200M.
- 4 major production operations employ over 1000 each, 2000 in Santa Clara CA. Other locations are the original plant in New Hampshire, plus acquisitions in New York (over 15 years ago) Arizona, and Northern California were more rapid-fire acquisitions. Acculturation has been a difficult process in some cases. There is also an important, growing production plant in Malaysia, about $50M output.
- 3 Quick-Turn, prototype operations in Northern California, Austin, and Massachusetts account for $90M sales
Large-scale operations qualify Hadco for high volume requirements of large OEM and EMS customers, but they do reduce flexibility. Also there is greater loss risk below 80% break-even point in down markets because of the large equipment capitalization.
At this point both companies are enjoying gross margins over 15%.
QUO VADIS for Sanmina-Hadco (Our take)
Sanmina management has stated re the merger that finalization will occur by August. But the Hart-Scott-Rodino Act empowers the FTC to intervene within a month if monopoly effects are anticipated. Then the merger would be expected to take place by November 2000.
So the FTC will be listening to competitors, customers, and suppliers. Knowing the PCB industry, I think that they will be provided with complaints. I also think that Sanmina will find these a convenient excuse for divesting parts of Hadco as separate companies.
Sanmina will keep
- The 3 prototype operations along with design centers that support them
- Production operations in areas not now represented, such as Malaysia, Arizona, New York
- Valuable technology and technologists for microvias, RF, rigid-flex
Harvey MillerFABFILE SYSTEMS 255 TOWN & COUNTRY VILLAGE PALO ALTO CA 94301 (650) 327-2029 hmiller560@aol.com