Comparing Two Flexible Circuit Companies: Innovex and M-Flex

Estimated reading time: 4 minutes

M-Flex presented a chart at the recent Needham 10th Growth Stock Conference, January 2008, comparing its sales growth to that of its peers. Two companies stand out like opposite poles for fiscal year Compound Annual Growth Rate between 2002 to 2007. M-Flex was number 1, +35.7%; Innovex was last, -6.8%. The difference reflects quality of market strategies, wisdom of acquisitions, and motivated teamwork. Both operate in the growth interconnection flexible circuit industry. Their specific flex market specializations serve markets quantitatively similar. For M-Flex the Total Available Market units are over a billion cell phones. It has almost half the market. For Innovex it's almost a billion disk drive suspension assemblies per year and an equal number of actuator flex assemblies. Innovex will soon be out of the suspension assembly flex business and has less than one-third of the actuator flex business it once enjoyed. Why?

The Innovex Story

Its remaining assets in Thailand and customer base will be of value to someone, but its name will disappear as did the names and most of its business acquisitions Litchfield Precision Components and Adflex.

In 1996, company sales were $70M (w/o Litchfield) comprised mostly of tiny wire harnesses that interconnected disk drive read-write magnetic heads to the electronics. Everyone knew that the magneto-resistive head was coming. The phenomenon, increased resistance on application of magnetic field, had been discovered in 1988. IBM scientists created a sensor, requiring 4 leads. IBM was working with Hutchinson Technology to integrate its chem milled stainless steel slider with an etched interconnect. The Trace Suspension Assembly now dominates. Rogers and Mitsui Toatsu were to supply Flex-I-Mid cast polyimide, $30M worth in 1998. The program was underway, leading to doubling Hutchinson's sales by 2008 to over $800M for TRC assemblies, w/o head. We estimate the annual Hutchinson value of the etched structure at about $180M, replacing the wire harness, based on $60M inferred value of Flex-I-Mid. Hutchinson has about 60% of the world market. Innovex decided to reinvent itself and compete against Hutchinson's TRC. Hutchinson, a Innovex customer and supplier, was now a competitor, as well.

Innovex paid $8.5M for $10M sales Litchfield Precision and thereby acquired a vehicle for design and manufacture of the Flexible Suspension Assembly. It worked for a while. They sold it to Seagate mounted on a Hutchinson slider. But Innovex was never honest about its cost. They compiled a record of losses. Valuable team members departed Litchfield after the acquisition. Then in 1999, Innovex made a major flex acquisition, Adflex, with sales of $160M. Price was less than $26M, reflecting low profitability. Again key people left.

Adflex had been part of Rogers Corporation, previously (Rogers got smart and realized that they were a materials company that had no business competing with its customers). So instead of working hard to improve the FSA, Innovex diverted resources and management time. Perhaps they saw value in market synergy by gaining a big chunk of disk drive actuator business.

Throughout this period, Bill Murname was President and CEO of Innovex, which coincidently never made a profit in this period. There were always good excuses though, and much of the financial community bought them. Now Bill has been kicked upstairs to COB and Terry Dauenhauer has been brought in from Seagate, probably to negotiate a sale of the assets. There were no questions at the last investor conference. The stock at 44 cents is on the pink sheets. By the way, Bill Murname had no previous experience in Electronics.

M-Flex

I remember visiting Phil Harding at M-Flex in the late 1980's. He was late, so I missed my plane, but it was worth it. He's the kind of leader who is constructively involved at every level and the record shows. There were some grim times in 2006. Motorola's cell phone business constituted 80% of M-Flex work. MOT had driven M-Flex sales to the $500M level, but now its share was dropping. When I visited in the late '80s sales were $25M.

In record time, M-Flex filled the gap due to MOT's declining share. It was ready to offer service to Sony-Ericsson as it grew share to fill part of that lost by MOT. And RIM needed more production capacity, as well.

By reporting time for 2007, M-Flex was back on the growth curve at a profitable $508M. Ramping up new programs with minimum yield loss takes teamwork. Now MOT is under 40%, S-E is almost 40% and RIM about 10%.

M-Flex moved production to China early. They make careful investment decisions, such as Aurora Optical Technology for lens development and embedded inductors, that build on and extend their strengths.

Conclusion

It's mundane and trite, but tearing down is a lot easier than building up, as any 4 year-old can tell you. When bad leadership is not recognized there has to be suspicion of other relationships that violate stockholder interests. I don't want to go there.

The entire disk drive industry is in play. Innovex remnants will have a role to play. Maybe Seagate will integrate further. Maybe M-Flex will buy it. There will be a lot of tire-kicking.

As a member of the I-Connect007 team, I shall never take a position in companies that I write about, that might affect my objectivity - Harvey Miller.  harvey@fabfileonline.com