Mergers and acquisitions are often a double-edged sword for the electronics supply chain. Several high-profile semiconductor M&As this year have analysts praising the financial soundness of the mergers and the expansion of product portfolios. For purchasing professionals, buying more products from fewer vendors help consolidate their supplier base.
At the same time, M&A also means the big get bigger. For example, connector analyst Bishop & Associates found the 10 largest makers of connectors now account for nearly 57 percent of worldwide connector demand. In 1980, the top 10 accounted for 38 percent of the industry.
For the companies themselves, says Ron Bishop, head of Bishop & Associates, the advantages are clear: they have more engineers, larger sales and marketing organizations, more manufacturing plants located in all geographic regions and greater financial resources. “The result of these advantages is a broader product offering and a global presence with the ability to serve the world’s largest OEMs,” Bishop says in Connector Cable and Assembly Supplier. Moreover, the top 10 achieved a higher growth rate between 1980 and the present: the top 10 achieved a 6.7 percent compound annual growth rate (CAGR) from 1980 to 2014 versus industry growth of 5.5 percent.
Much of this growth came through acquisition. TE Connectivity acquired Thomas & Betts’ connector business, DEUTSCH, ADC, and numerous other companies. Molex acquired Woodhead, FCT, Affinity Medical, Luxtera’s Merge Optics, and others. Amphenol acquired Teradyne’s high-speed connector business, FEP, and a few dozen other companies. It recently announced that it will acquire FCI’s connector business. Delphi acquired FCI’s automotive interconnect business.
On the “pro” side of the ledger, acquisitive companies are able to provide a wider range of products through a single vendor and most businesses are more financially sound after integrating an acquisition. On the “con” side, consolidation could result in a reduction in the number of suppliers in any key product sector to a handful. Mergers sometimes disrupt distribution channels if the suppliers don’t share all the same distributors.
Also, big companies tend to have a lot of clout; some will require minimum orders, for example, and most don’t want to deal with small-sized customers. In the connector industry, for example, TE Connectivity is the 800-pound gorilla with 16.7 percent of global share. Amphenol now is approaching $5 billion in sales and has nine percent of the market. Amphenol’s acquisition program has made it the fastest-growing company in the industry, achieving a 10-year CAGR of 14.8 percent, according to Bishop. Molex is now a private company owned by Koch and has 7.1 percent of the market.
Electronics distributors — several of which now dwarf their suppliers in terms of revenue — haven’t been hurt by the recent spate of mergers. During the 1990s, though, it was another story. Many suppliers – which outsized their channel partners -- refused to be sold alongside competitors through the same distributor. The merger of an AMP (now part of TE Connectivity) and Molex at the time could result in a distributor losing both lines. “At this point in time, the mergers we have seen have been positives for us,” said Michael Long, CEO at Arrow Electronics Inc. during a recent analyst conference call. “What we've seen is an expansion of products usually on our line card, which we like because we have more to sell. It widens the market and gives us a better opportunity, especially in slow growth environments. And then if you get a good growth environment, it sort of actually maximizes for you.”
Avnet Inc. senior vice president, supplier management and business development for Avnet Electronics Marketing Americas Alex Iuorio shared that sentiment earlier in the year when Freescale and NXP announced a merger. “I don’t see any downside,” said Iuorio. “They’ll represent a broader product portfolio and when you balance that against the customer base and the continual move toward consolidated vendors—that fulfills the customer charter as well.”
Bishop expects the pace of consolidation in the connector industry will continue. “We also noticed a lot of interest in acquisitions from Chinese companies,” Bishop told Connector Cable and Assembly Supplier. “Until recently, the Chinese have not been active in M&As. However, they now appear ready to acquire both in the U.S. and Europe.”
A key issue for connector makers in the coming year will be managing costs and maintaining profit margins. Bishop is forecasting only marginal – one percent to three percent - or flat growth for 2016. Prices of raw materials have come down in 2015, according to the Institute for Supply Management, meaning customers may seek price reductions from vendors. This always happens when demand is soft and delivery lead times are shrinking, according to Bishop.
Price reduction in the IP&E industry has been an ongoing challenge for distributors which rely on their suppliers to support their profit margins. At the same time, said Brad Holcomb, chair of the ISM Manufacturing Business Survey Committee, low materials and energy costs may give manufacturers an opportunity to shore up profit margins in 2016 – if they can also control costs.