Micron sells manufacturing unit
Micron Electronics is spinning off its custom manufacturing services subsidiary in a deal valued at $271 million as it refocuses on shoring up its PC business.
Micron plans to sell 90 percent of the contract manufacturing subsidiary to Cornerstone Equity Investors. The cash deal is expected to close by April, pending shareholder approval, and Micron will retain a 10 percent stake in the company.
"MCMS had higher profit margins than Micron's PC business, but it's a good move for them," said Robert Toomey, an analyst with Piper Jaffray. "That business wasn't that big, and it wasn't strategic to their operations. It was like a side business."
MCMS is a contract manufacturer of custom-printed circuit boards, memory modules, and system-level assemblies. The subsidiary receives most of its business from companies other than Micron, and accounted for 13 percent of Micron's overall revenues in its first fiscal quarter.
"Micron will have to take the cash and figure out a way to make up for the lost revenues and profits from spinning this off," said Louis Mazzucchelli Jr., an analyst with Gerard Klauer Mattison.
Mattison said the company may want to consider using the proceeds from the sale to enlarge its distribution channels and expand its operations overseas--especially in Europe, where the company suffers a low profile.
Micron, for it's part, declined to discuss future uses for the capital.
"We've worked on the sale of our custom manufacturing operations for the past couple of months," said Denise Smith, a company spokeswoman. "The PC operations represent the core of our business, and we're going to focus on our core competencies."
Analysts applauded the move.
Micron posted weaker-than-expected first-quarter results as pricing pressure on PC sales and component inventories hurt its bottom line. The company reported net profits of $1.1 million for the quarter, compared with $24.8 million a year ago. Revenues, however, rose to $558.9 million, up from $421 million a year ago.
Computer makers increasingly are stepping into Micron's territory by offering direct sales. Compaq and CompUSA are just two of the latest examples. Micron's contract manufacturing subsidiary, along with its SpecTek semiconductor memory products, helped to offset the lower gross margins of its PC business.
SpecTek resells non-standard DRAMs that don't meet full specifications to laser printer, fax machine, and answering machine companies, Smith said. The chips are used in any devices that do not need full-spec DRAM. SpecTek, which accounted for 5 percent of Micron's total first-quarter revenues, will remain a subsidiary of Micron, Smith said.
"SpecTek gives them a low-cost source of memory chips and still makes sense for the company to hold on to, since chips are so important and integral for manufacturing PCs," Toomey said.
Shares of Micron rose slightly in morning trading, reaching as high as 9-7/8 from its close of 9-3/16 on Friday.