The Starting Line: Sanmina-SCI may spark mergers

Sanmina and SCI, two contract-equipment manufacturers, announced a stock swap valued at $6 billion including debt on Monday. The deal is among the largest in the tech sector this year and could be a sign of things to come.

As the stock markets fell and once high-flying companies fell to earth, the merger and acquisition activity dried up. Tech companies would make an odd acquisition here and there to take out a competitor or add to their product portfolio, but most big deals were tabled until further notice.

According to research firm Mergerstat.com, tech mergers have slowed dramatically from a year ago. From Jan. 1 to July 13, 2000, tech companies announced 2,440 deals valued at $349.11 billion. From Jan. 1 to July 13, 2001, the number of announced deals fell to 1,696 valued at $104.17 billion.

In 2000, the merger that created AOL Time Warner tipped the scales at a value of $110 billion, according to Mergerstat. Other whoppers included JDS Uniphase buying E-Tek Dynamics for $17.4 billion and VeriSign's acquisition of Network Solutions for $15.2 billion.

What a difference a year makes. If you exclude debt, the Sanmina-SCI combination would have barely made Mergerstat's top 10 list for 2000. That's fine with SCI CEO Eugene Sapp. "We believe the timing for this merger is almost perfect as we look ahead to recovery," Sapp said.

His counterpart at Sanmina, CEO Jure Sola, echoed those comments. On a conference call with analysts, executives from both companies talked about graduating to the contract-equipment big leagues along with Solectron, Flextronics and Celestica. And, they said, by the time the companies work through the integration issues involved with the merger, the tech sector will be ready to bounce back.

The comments from Sanmina and SCI executives sounded familiar to those from LSI Logic earlier this year when it bought C-Cube for $878 million. It made the purchase to round out its product line and diversify into new markets.

The theory behind these mergers is to invest and build in a downturn to prepare for a rebound.

Analysts said mergers and acquisitions so far have been few and far between, largely because companies are struggling to get their own houses in order. With layoffs and restructuring the order of the day, it's hard for executives to ponder integrating a new company, analysts said.

Even worse, companies such as Ariba announced acquisitions only to watch the deal fall apart as shares plunged.

"There was a tremendous level of valuation volatility," said Bob Kipps, senior vice president in the technology group of Houlihan Lokey Howard & Zukin, an investment firm. "Now that things have stabilized, we're expecting a modest amount of activity for the rest of the year."

Takeover talk heats up
Indeed, Cisco Systems, technology's king of acquisitions, last week announced its first acquisition of the year. The company bought AuroraNetics last week in a deal worth $150 million. Cisco has averaged 20 acquisitions a year over the last two years.

Although the deals are merely trickling in, the takeover talk is starting to heat up. Analysts are expecting more consolidation in the contract equipment-manufacturing sector. And that's not the only sector ripe for consolidation; analysts are talking about mergers in the Internet, networking, telecommunications and PC sectors too.

CIBC World Markets analyst John Corcoran started coverage of EarthLink last week and became the latest to give the stock at least a "buy" rating. Although analysts back up their ratings on EarthLink with talk about it being the second-biggest Internet service provider, many mention that it's an acquisition target.

"We think the most likely end game for EarthLink is to become a major player in the broadband arena or to be acquired," Corcoran said.

And Comcast's unsolicited $58 billion bid for AT&T's cable unit would certainly be a headliner acquisition for the tech sector so far this year. More importantly, the Comcast bid could encourage other deals and set off a consolidation spree in the cable and telecommunications sector.

"We do not believe that AT&T can afford to take the Comcast offer lightly," said Jea-Hun Shim, an analyst with Credit Lyonnais. "We would also be very surprised if AOL did not make a counter offer for AT&T Broadband."

Shim, like other analysts, is busy pondering partners--Charter Communications, Vivendi and Disney--for AT&T's cable unit. If AT&T Broadband was acquired, Baby Bells such as SBC Communications and Verizon could buy what's left of Ma Bell.

Analysts are speculating at this point, but none of the ideas are too far-fetched and that's a good sign, Kipp said. "It's the reverse of last year," he said. "In 2000, we were talking about Yahoo buying Disney."