Ingalls & Snyder, LLC analyst Alex Blanton, provides additional insight into the Flextronics acquisition of Solectron – believing the important aspect about the prospective Solectron purchase is the unrealized gross and operating profit that Solectron has left lying on the table for the past six years because its costs are simply too high.
Mr. Blanton believes one thing Solectron is good at is manufacturing high-end electronic and electro-mechanical products. Flextronics’ chairman and CEO, Michael McNamara, said on Flextronics’ July 26 earnings call that he agrees with this assessment, and, continues Ingalls & Snyder’s Blanton, “Flextronics said a number of times on its June 4 acquisition call that Solectron’s high-end skills were an important reason it wanted to buy the company”.
Mr. Blanton’s report also points out Flextronics’ McNamara, said on a previous investor call, that he agrees with Mr. Blanton’s assertion – with its high-end product line, Solectron ought to have a higher margin than Flextronics on its own and before the synergies of combining the two companies. (Solectron’s most recent operating margin of 1.6% is only about one-half of Flextronics’ 3.0%)
One issue Ingalls & Snyder feels is due for an early resolution is the Solectron Global Services after-market contract that has caused Solectron’s overall gross margin to decline while its manufacturing gross margin has been rising in line with targets Solectron set last year. On this note, Flextronics has proven it is not complacent and tends to exit businesses that either become underpriced or otherwise unattractive over time.
Light at the end of the tunnel?
Flextronics has indicated it has found the potential added value from Solectron to be greater than previously anticipated. Mr. Blanton’s report goes on to indicate Flextronics says the condition of Solectron’s plants; its implementation of lean, its technical skills, its customer relationships, and its potential profitability are each greater than anticipated. Based on this, Flextronics has cut six months off the expected time to realize full synergies and thinks the revenue loss due to the combination will be substantially less than the $1.5 billion it had included in its original forecast.
Flextronics’ McNamara has completed a three to four week round of visits to Solectron’s global facilities and says that some of Solectron’s plants are doing things in manufacturing that no other company in the world could do, particularly the two Solectron plants that supply Cisco with its highest-end product.
McNamara was quoted as saying, “I visited almost every one of Solectron’s factories around the world. Overall, I am pleased to say that their factories and capabilities exceeded our original expectations. I was extremely impressed with the operations and the people. Our integration planning has been further developed since the [June 4] announcement and we feel it should not take us 18-to-24 months to achieve our targeted $200 million of annualized after-tax savings [synergies].
McNamara added, “We are comfortable reducing this estimated time frame to 12-to-18 months. Lastly, and perhaps more importantly, the customer feedback has been positive and even better than anticipated…. Our confidence level about our ability to successfully integrate it into Flextronics is extremely high and it continues to increase as we dive into the details and further develop our integration plan.”
Source: Ingalls & Snyder, LLC
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