M & A Roundup – Washington Update: Sanmina’s Deal With Hadco Hastens Growth

The $1.3 billion merger between Sanmina Corp. and Hadco Corp. should accelerate Sanmina’s growth plan while providing a kick-start to some of Hadco’s underperforming as-sets. “This deal isn’t something Sanmina needs right away, but if you look three years down the road, it’s going to look like a smart move,” said Vernon P. Essi, a technology analyst at Adams Harkness & Hill Inc. in Boston. With a market capitalization of $835 million, Hadco is considerably smaller than Sanmina, whose market capitalization totals $6.5 billion. Essi noted that Sanmina has aggressive, competent managers who will be able to optimize some of Hadco’s facilities, which he said are struggling in terms of profitability and utilization. A comparison of the two companies’ acquisition records also supports the strategic rationale of the deal, he said. The deal follows a series of acquisitions by Sanmina, which is struggling to keep pace with demand for the electrical components needed to beef up the Internet infrastructure. In March, Sanmina bought two manufacturing plants from Harris Corp. and Alcatel USA Corp. to relieve record backlogs. Essi said that Hadco had stumbled in leveraging the value in its 1998 acquisition of Continental Circuits Corp. Another positive aspect of the deal is the fact that Sanmina’s roots are in the printed circuit board (PCB) manufacturing business, which is Hadco’s primary product line. PCB and backbone fabrication for other parties only represented an estimated 10% of Sanmina’s fiscal 1999 revenues of $1.2 billion, but Essi believes that this common heritage will help it integrate and profit from the Hadco acquisition. Hadco is the largest North American producer of PCBs. Sanmina’s other products include backplane assemblies and optical networking devices. In a business in which economies of scale are vital, the combination of Sanmina and Hadco should be able to achieve further operating efficiencies and allow a higher level of growth than Sanmina could have achieved independently. Sanmina management said the pact would help position the company as the go-to player in the electronics manufacturing sector. While telecom and datacom manufacturing produced about three-fourths of Sanmina’s business last year, high-tech electronics manufacturing has only recently begun to embrace the outsourcing of production to contract manufacturers like Sanmina and Hadco. Some analysts are predicting that the companies’ combined communications products are likely to grow into a more than $300 billion market in only a few years. “Importantly, the combination of our two companies enhances our ability to meet the increasing demands by our telecommunication customers for advanced optical networking technology. We believe that this merger will firmly establish Sanmina as the global leader in printed circuit board fabrication technology,” said Jure Sola, Sanmina’s Chairman and CEO.