One decade after it began a series of acquisitions aimed at boosting sales and profit expansion Vishay Intertechnology Inc. is still struggling to find the right formula for differentiating itself in one of the most competitive and growth-challenged segments of the electronics components market. The company has made many acquisitions and broadened its product offerings with proprietary parts but these actions haven’t eliminated many of the challenges it faces. Could becoming part of a larger enterprise be the solution?
A merger of Vishay with a bigger rival or the outright acquisition of the company would shake the global passives components market where the company has been a leading consolidator for decades. Founded in 1962, Vishay has grown through both internal expansion and acquisitions. It has since 1985 bought almost 25 companies with the latest transactions being the 2014 purchase of Capella Microsystems Inc. These deals have added discrete semiconductors to the product offerings of the passive components supplier and helped it avoid some of the negative impacts of commoditization on the industry.
Acquisitions didn’t fully shield the company from the electronics industry’s infamous wild swings, however. In response to changing market conditions, Vishay has been cutting costs and reorganizing operations for several years now. Some of these actions were limited and targeted but the recent steps were more drastic. In a bid to align expenses with lowered sales forecasts, the company has offered early retirement to some employees and laid off personnel. With sales and earnings continuing to wobble, though, the management is examining the possibility of a strategic cut in some product lines without – it insists – impacting negatively plans for the faster-growing Asia market. Executives also want to maintain the ability to keep tacking on “strategic acquisitions at appropriate valuations,” according to Gerald Paul, president and CEO.
The latest reorganization actions are projected to reduce costs by up to $35 million per year and includes the termination of the company’s employee pension plan with the benefits of all participants being converted into “a lump sum cash payment on annuity contract placed with an insurance carrier,” said Lori Lipcaman, CFO at Vishay, during a conference call with analysts to discuss June quarter results. The company is also expected to cut some product lines as part of this cost-reduction efforts, she said.
“Some of these projects have already started and we recorded $4.7 million of restructuring costs in the second quarter related to these programs. Our previously announced cost reduction programs continue to be on track. We’re recording an additional $0.9 million of restructuring expenses in second quarter 2015 related to our MOSFETs enhanced competitiveness program,” Lipcaman said. “As discussed previously, this program will be implemented in steps through first quarter 2016 with a long-implementation primarily due to automotive qualification complexities. Meaningful cost savings are not expected until the program is nearly completed, but are expected to be approximately $23 million per year when fully implemented. Restructuring charges are recognized ratably during the implementation period.”
Complex reorganization actions like the ones Vishay has implemented and continues to carry out are typically the first steps companies take when faced with challenging market environments. More drastic actions have included the sale of business units or even a merger of the enterprise with a larger rival, actions Vishay itself had engaged in previously when it bought troubled competitors or their operating divisions.
After years of leading the consolidation of its market segment with small- and medium-size acquisitions, perhaps Vishay itself should be seeking a merger with a bigger or similar size company in a move that would accelerate its cost reduction efforts across all corporate functions, deepen relationship with strategic customers globally and improve its ability to weather the market’s continuing spot weaknesses.
A merger with a competitor or an outright sale to a bigger rival would be contrary to the management’s already outlined initiatives, which heavily tilt towards cost-reduction to stop the erosion of profit margins, and acquisitions-fueled sales expansion. Vishay has coupled these moves with continued differentiation through research into and development of proprietary products for faster-growing markets like telecommunications equipment and solidly reliable sectors such as automotive and industrial machinery with their long development cycles.
The actions taken over the years have helped Vishay avoid the steeper sales decline it could have experienced since the electronics industry went into a giddy tailspin at the beginning of this century but they haven’t completely stopped the negative pressures all suppliers in the interconnects, passives and electromechanical (IP&E) market have been under for more than a decade now. M&A activities have helped reduce the number of suppliers in the segment and this, combined with the growing inclination for smaller numbers of approved vendors at OEMs and electronics manufacturing services (EMS) providers, have moderated what could have been even more corrosive sales and margins pressures at vendors.
Price erosion remains the biggest challenge facing companies in the sector. Component average selling prices (ASPs) have continued to slide throughout the industry, adding to competitive concerns at companies like Vishay. In the June quarter, for example, Vishay reported ASPs fell 3 percent from the year-ago quarter and 1.3 percent sequentially, according to Lipcaman. The pricing environment is unlikely to change swiftly, acknowledged CEO Paul, noting the situation remains unpredictable on a short-term basis.
These are not the only challenges facing Vishay. The company’s June quarter results lagged expectations with sales dropping more than 8 percent year-over-year, to $590.47 million from $641.93 million while net profits tumbled to $26.27 million from $35.64 million. The sales decline resulted from a “substantially less-friendly economic environment than anticipated,” Paul said. “Sales in the quarter came in below the range of our guidance.”
The outlook isn’t any more cheering. Third quarter revenues are projected in a wide range of $560 million to $600 million,” vs. $638 million in the comparable quarter of 2014. Even this forecast may be optimistic considering recent developments in China where the manufacturing sector has come under pressure with exports sliding below economists’ expectations. This is likely to hurt Vishay and other component suppliers to the contract manufacturers and OEMs that operate production facilities in China at a time when the European market remains in a flux.
In this environment, Vishay could try to ride out the storm by itself as it has successfully done in the past. It could also take the option of a strategic merger with one of its principal competitors. The management appears to be moving in a different direction but it’s an option they should nevertheless seriously consider because the headwind blowing in from China may drag on for years. While proprietary products and acquisitions may have bought Vishay some time, this strategy may no longer be sufficient to ward off the corrosive effects of commoditization and price erosion.