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Sanmina acquires SCI in $6 billion deal

Contract-equipment manufacturers Sanmina and SCI Systems say the merger will create a company with about $14 billion in annual revenue.

Contract-equipment manufacturers Sanmina and SCI Systems said Monday that they will merge in a $6 billion stock swap to create a company with about $14 billion in annual revenue.

Under the terms of the deal, each share of SCI common stock will be converted into 1.36 shares of Sanmina common stock. Based on Sanmina's closing price of $22.14 on July 13, the transaction is valued at $30.11 per share of SCI, or $6 billion including the assumption of debt.

SCI shares jumped 5 percent on the news, rising $1.28 to $26.45; they rose as high as 12 percent earlier in the day. Sanmina shares were off nearly 11 percent, or $2.38, to $19.76.

The combined company would become one of the larger contract-equipment manufacturers, which make products for technology companies such as Nortel Networks, Cisco Systems and PC makers. Solectron remains the largest contract-equipment maker. Analysts said the deal could also spark further consolidation in the industry.

The deal "eliminates the perception that Sanmina is a niche player and allows us to compete more effectively," Sanmina CEO Jure Sola said in a conference call.

Indeed, Robertson Stephens analyst J. Keith Dunne said the deal would create a "powerhouse," and said in a research report that it was a "landmark transaction for the industry."

Sanmina has been among the more active companies on the acquisition front. Last month, it bought Alcatel's manufacturing operations in Richardson, Texas. With the Sanmina-SCI merger, the companies will graduate to the "super tier" of contract-equipment makers, a group that includes Solectron, Flextronics and Celestica, said Goldman Sachs analyst Michael Zimm.

In a research note, Zimm was upbeat about the combination. He said Sanmina will now be able to compete for larger deals as tech companies gravitate to larger contract-equipment vendors.

Contract-equipment makers are using the current economic downturn to boost capacity as companies continue to outsource. IDC estimated last week that contract manufacturing was a $103 billion business in 2000 and that it would grow to $231 billion in 2005.

Although the long run looks bright, a tech-sector slump is hurting profits for contract-equipment companies. Sanmina, which will report earnings Wednesday, recently issued a profit warning. The company said it would report pro forma earnings of 10 cents a share on sales of about $760 million to $775 million for its third quarter ended June 30.

"We believe the timing for this merger is almost optimum, as we look ahead to recovery and a very large number of substantial opportunities that the two organizations can jointly participate in," SCI CEO Gene Sapp said.

The companies said they expect to save $100 million to $150 million through the merger. The deal should also add to Sanmina's earnings in fiscal 2002. Some savings could come from having Sanmina supply certain products that SCI was purchasing from outside suppliers, officials said.

Officials declined to give more specific details of the combined company's finances, saying that the best bet for now would be just to add predictions for the two separate companies.

The new company will have 100 facilities in 21 countries, with more than 50,000 employees. The bulk of its revenues, 47 percent, will come from the "long-term, high-growth communications segment, mostly communications infrastructure," said Sanmina Chief Operating Officer Randy Furr.

Eighteen percent of revenue will come from high-end computing, 17 percent from PC manufacturing, 5 percent from multimedia business and 13 percent from industrial and medical instrumentation.

Sola is expected to lead the combined companies with the deal closing in the first quarter ending Dec. 31. Officials said a new name for the company will be announced when the deal is complete and will likely incorporate both companies' names.