Solectron to buy C-MAC for $2.7 billion

Solectron, based in Milpitas, Calif., said the deal should generate $60 million to $120 million in cost savings and new revenue, and should begin adding to the bottom line in 2002.

The company also updated its outlook for the fourth quarter and fiscal 2002. The company said sales in the fourth quarter should be between $3 billion and $3.5 billion, and earnings per share before restructuring charges and other one-time charges should be between 5 cents and 9 cents. First Call consensus estimate for the quarter was a 6 cent per-share profit.

Solectron now expects to record $260 million in restructuring charges for the fourth quarter, up from the $50 million it predicted in June.

For 2002, the company expects to see sales between $16 billion and $18.5 billion, and earnings per share between 62 cents and 66 cents per share before acquisitions. Analysts had been expecting the company to post a profit of about 65 cents per share for the year, according to First Call.

The C-MAC acquisition is expected to close by the end of 2001, and will require Solectron to issue 1.755 shares of its stock in exchange for each C-MAC share.

"C-MAC's systems-solutions expertise helps Solectron meet a key long-range initiative and further strengthens our industry-leading technology, manufacturing and supply-chain services," Solectron CEO Koichi Nishimura said. "In addition, the transaction provides us with access to the automotive electronics industry, which we have specifically targeted for growth.

Analysts were initially upbeat about the deal. "We view this acquisition favorably as it furthers Solectron's vertical integration strategy, broadens the company's manufacturing capabilities (microcircuits, enclosures and backplanes) and presents new business opportunities in markets such as the automotive segment," said Merrill Lynch analyst Jerry Labowitz. The Solectron-C-MAC deal is the second large merger that the electronics manufacturing industry has seen in the past few weeks. Last month, Sanmina and SCI Systems announced a $6 billion deal that would create a $14 billion company. At the time, analysts called that deal a "landmark" for the industry saying it would create a "powerhouse."

But while the new deal will beef up Solectron's power in its industry, it does add some baggage. Montreal-based C-MAC's major customers are in the telecommunications industry, and the company said that "order visibility from C-MAC's customers in the communications end-market is still limited and difficult economic conditions persist."

As a result, C-MAC now expects that second-half results should be about on par with the first half, with third-quarter revenue coming in at slightly higher than $374.76 million ($575 million Canadian), and earnings per share before goodwill amortization to be between 7 cents and 10 cents. Analysts had been looking for the company to record a profit of 20 cents per share in the third quarter, according to First Call.