Shareholders of Milpitas, California-based Solectron can choose to get 0.345 share of Flextronics or $3.89 in cash for each share, the companies said in a joint statement today. The cash bid is 15 percent more than Solectron's closing price June 1.
The purchase gives Flextronics contracts with Cisco Systems Inc. and International Business Machines Corp. Flextronics, which makes the Xbox 360 game console for Microsoft Corp., was second only to Taiwan's Hon Hai in sales before the deal, and this helps the company narrow the gap, according to Cowen & Co. analyst Louis Miscioscia.
The deal ``adds a couple of good customer relationships in Cisco and IBM,'' the New York-based analyst said in an interview. ``It also gives them the opportunity to do an accretive deal and gives them more size and scale, which allows them to make more efficient use of their facilities.''
Shares of Solectron surged as much as 46 cents, or 14 percent, to $3.83 at 11:07 a.m. in New York Stock Exchange composite trading. Shares of Singapore-based Flextronics fell 23 cents to $11.47 in Nasdaq Stock Market trading.
``It's a bit of a surprise and doesn't offer immediate accretion, so investors will be a little bit wary,'' Miscioscia said. ``But in the end it's the right thing for the company.'' He rates Flextronics ``outperform'' and Solectron ``neutral.''
Saving Money
The combination will cut costs by as much as $200 million after taxes in the 18 to 24 months after the deal is completed, and boost earnings per share by at least 15 percent, Flextronics said. The transaction should close by the end of this year.
Flextronics competes with Toronto-based Celestica Inc. and Taiwan's Hon Hai, Miscioscia said. Solectron is the fifth-largest maker of electronics, which helps bolster Flextronics position in second, the analyst said.
`Solectron's strength in the high-end computing and telecom segments will be an invaluable addition,'' Flextronics Chief Executive Officer Mike McNamara said in the statement. ``The combined company will be a market leader in most product market segments.''
The combined company will have more than $30 billion in annual sales and about 200,000 employees, Flextronics said. The company reported fiscal fourth-quarter profit tripled to $121 million as sales gained 32 percent.
Flextronics finance chief Tom Smach didn't immediately return a call seeking comment, nor did spokeswoman Renee Brotherton.
Under the offer, Flextronics will limit the proportion of Solectron's outstanding stock that will be converted into its shares to between 50 percent and 70 percent, the companies said.
Job Cuts?
Solectron said in March it may eliminate as many as 1,500 jobs as it closes some factory space in North America and Western Europe.
Last year, Flextronics bought International DisplayWorks Inc. to add liquid crystal displays for cell phones and portable MP3 music players. In August, Flextronics reached an agreement to produce digital cameras for Eastman Kodak Co.
Citigroup Inc. is the financial adviser for Flextronics, while Goldman Sachs Group Inc. advises Solectron. Citigroup also agreed to provide Flextronics with a $2.5 billion, seven-year loan to help finance the purchase.
Source : Bloomberg.com
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