Private equity firms look for money from high net worth individuals and wealthy investor groups and use the funds to take over; change, and resell companies.
Private equity firms usually invest in growth businesses or organizations that serve a specific niche in a particular industry. EMS isn’t typically categorized as a growth industry.
Meanwhile, more EMS providers are finding it difficult to strengthen their position in the marketplace. Many have not been able to find sure footing for some time. Some providers turn to acquisitions with hopes to acquire new customers with other providers serving similar or new markets. But how much do you pay and how do buyers determine manufacturers valuations. And, for many reasons most manufacturing M&A in all industries don’t work.
SEE ALSO
Buy-sell business valuations in EMS manufacturing
Recent trends in contract electronics M&A
EMS mergers, acquisitions, joint ventures, partnerships
The chart below illustrates the chances for M&A success based on whether or not the buyer is acquiring a company with a technology that matches his own, or has technology that is an extension of his own or, has a completely new technology. The same can be said for market. For example, an EMS provider serving non-traditional electronics services end markets may not do as well should he acquire a provider serving the consumer devices market.
In some cases, it would seem some EMS companies have no idea about channel branding strategic marketing (online and in print) or understanding differentiation and company and industry value propositions.
Electronics contract manufacturing services can be a tough haul, indeed. Margins are thin and pressure from savvy OEMs wanting continuous cost savings can be relentless. (See also: OEM Audit of contract electronics services and EMS financial due diligence)
RELATED
EMS manufacturing cost models
EMS internal factory costs vs OEM customer pricing
Today, there are private equity beacons searching for suitable EMS companies to add to their portfolios. But, not all EMS providers are alike. Below are some questions and points of interest investment firms should consider when deciding whether or not an EMS company might be a good risk. For example:
- Is an experienced executive team in place? If a board of directors exists, does it have adequate depth and scope of experience in the right places? Is the chairman of the board also the CEO? If so, what are the chances board members are telling the chairman (CEO) what he ‘wants’ to hear vs. what should be said?
- Does management have a good network of industry relationships and contacts?
- Is management skilled at understanding industry pricing drivers and negotiating service level agreements (which will be different for various industries such as medical) all of which create profitable transfer pricing?
- What percentage of the EMS business is front-end design? What percentage is SMT and printed circuit board assembly?
Read postings from Mark Zetter on Linkedin
