Flextronics International Ltd.’s strategy for achieving financial stability seem simple enough except that, these days, drastic cost-cutting involving plant closures don’t necessarily go well with aggressive small and medium-size acquisitions. There’s a method to the madness, though, and company executives in recent presentations to analysts and investors have insisted this strategy is helping the contract manufacturer expand revenue and boost profit margins.
As it to serve notice to the industry that it remains committed to growth through strategic acquisitions even in unorthodox places, the top-tier electronics manufacturing services (EMS) provider today announced plans to acquire customized plastic solutions provider Riwisa AG to broaden its offerings in the medical equipment market. The transaction, expected to close in October, builds on similar deals the company has made in recent years, all of them focused on deepening relations with customers and adding offerings in higher-margin businesses.
The Riwisa transaction is part of a larger shift within Flextronics to expand offerings in strategic economic segments – automotive, consumer, medical, and industrial – through internal growth and the acquisition of new business opportunities in Western countries where many OEMs indicate they want their contractors to manufacture certain higher-value products closer to customers. Simultaneously, Flextronics continues to keep a close tab on costs and has been swift to shutter less profitable plants to reduce operating costs.
CEO Michael McNamara captured the essence of the company’s current strategy in the face of continuing economic pressure during a July presentation to analysts, noting “we prefer to direct our collective efforts as a company towards designing and executing supply chain solutions that can help Flextronics secure new customers and relationships while simultaneously expanding our presence within our existing customer base through incremental services.”
The acquisition of Switzerland-based Riwisa adds to Flextronics' already extensive offerings in the medical equipment contract manufacturing market where the company wants to establish a deeper relationship with customers through a variety of products. Buying Riwisa also offers the company the opportunity to integrate additional vertical products to its offerings.
Even as it continues to realign its costs structure by closing plants owned by its Multek division in Brazil and Germany, Flextronics has been very active in the mergers and acquisition market in an attempt to diversify its portfolio to reduce the impact of high-volume but low margin personal computer, mobile phones and other consumer electronics devices on its operations. In the last years, Flextronics has added numerous snack-size acquisitions, many of them totaling less than $20 million but all of which broaden the skills sets within the company. Behind these acquisitions is a recognition that many OEM customers prefer EMS providers who can serve them not just from major hubs like China but also in regional centers closer to end-users, according to Mike McNamara, Flextronics’ CEO.
“We are actively investing to help companies with regionalization, rationalization and optimization of their supply chains,” McNamara said. “This is leading to success, providing our customers with solutions that improve their cost structures, increase their supply chain velocity and reduce supply chain risk through the breadth and depth of our platform of supply chain solutions, which remains increasingly important as consumption becomes more geographically distributed and customers need solutions with more regional operations to fulfill these new demand patterns.”
Flextronics has certainly been active in buying businesses in Western high-cost locations to secure contracts with medium-size OEMs in these regions that are often not interested in shipping production to China or other south East Asian locations. The Riwisa acquisition falls into this category. Riwisa, a privately-owned business with about 300 employees, many of them highly skilled in the medical equipment sector, offers plastics processing products to OEMs in other economic segments, including consumer packaging and industrial. It has many customers already in Europe and Flextronics would be able to expand the roster by ding customers in other Western locations, according to company executives.
"The addition of RIWISA's precision plastics and automation capabilities to Flextronics Medical is a tremendous complement to the broad range of healthcare solutions we can offer our customers globally and underscores the strategic commitment we have made to expand our services in this market," said Mark Kemp, president of Flextronics Medical in a statement announcing the transaction. "We are very excited about today's announcement and look forward to creating a European Center of Excellence for precision plastics in Switzerland and adding RIWISA's highly talented team to the Flextronics family."
The Riwisa acquisition is only the latest in a string of strategic purchases that Flextronics has executed in recent years. In the fiscal year ended March 31, 2011, the company made three acquisitions totaling $17 million “net of cash” to expand its “capabilities in the medical and infrastructure business groups,” according to a Securities and Exchange Commission filing earlier this year. More recently, though, Flextronics in the fiscal period ended March 31, 2013 closed its $208.7 million purchase of Saturn Electronics and Engineering Inc., broadening its reach into the automotive, appliance, consumer, energy and industrial markets.
Also in fiscal 2013 Flextronics bought three other companies all of them serving highly specialized market segments, including medical, defense and LED. The acquisitions were not financially “significant to the Company's consolidated financial position, results of operations and cash flows,” it said in the SEC filing.
In addition to these small acquisitions, Flextronics regularly seeks out larger purchases that help it establish a tighter bond with current customers or gain contracts with newer customers. Although the company wants to reduce its dependence on lower-margin production it recently agreed to purchase the manufacturing assets of Motorola Mobility, a division of Google Inc., for about $188 million, to cement its “partnership” with the company, according to Christopher Collier, CFO of Flextronics in a presentation to analysts after announcing the fiscal 2014 first quarter results in July.