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M&A Activities in EMS Industry Re-Stabilizing
August 13, 2010 |Estimated reading time: 2 minutes
Mergers and acquisitions (M&As) in the EMS industry for the second quarter were slightly down compared to the previous quarter, according to Lincoln International. There were 10 completed transactions in Q2 2010, from 11 in Q1 (Chart A). On the other hand, the Q2 2010 Deal Volume Comparison also reports that economic conditions appear to have stabilized, which has created an opportunity for companies to pursue strategic investments within the EMS sector.Source: Lincoln International
Source: Lincoln International
As shown in Chart B, EMS consolidations represented six transactions, or 60% of total activity in Q2 2010, up from one transactions in Q1 2010. There were no OEM divestiture in Q2 2010 which is less than the one transaction in Q1 2010. There were also no vertical/horizontal convergences in Q2 2010, which is a significant drop from the seven transactions in Q1 2010. One transaction was classified as an EMS divestiture in Q2 2010, which is unchanged from the one EMS divestiture in the previous quarter. Three transactions were classified as private equity investments in Q2 2010. The recent spike in EMS consolidations, combined with the lack of vertical/horizontal convergences indicate electronics companies are looking to focus on building their core competencies.
As illustrated in Chart C, four transactions occurred within the U.S./Canada in Q2 2010, or 40% of total transactions, representing an increase compared to three transactions in the U.S./Canada last quarter. There were four European deals, up from three in Q1 2010. One transaction occurred within Asia, or 10% of transactions, three less than during Q1 2010 within that geography. There was one cross-border transactions for this quarter.
As shown in Chart D, transactions by size for the quarter were led by the Micro Tier, totaling nine, or 90% of all transactions. There was one transaction categorized as large in Q2 2010, or approximately 10% of the total.
Margin Squeeze and Expansion: Exploration of Margin Performance in EMSEMS companies are beginning to show improvements in margins after a recent decline in 2009, following efforts to focus on cutting costs, lowering production, pruning loss leaders and eliminating marginal customers.
Margin performance has improved for all tiers over the last twelve month period ended June 30, 2010, relative to 2009. The Large Tier improved gross margin, operating income margin and EBITDA margin to 7.3%, 1.5% and 3.6%, respectively, in the last 12 months (LTM), up from 6.4%, 0.9% and 3.1% for 2009. The Mid Tier similarly improved gross margin, operating income margin and EBITDA margin to 11.5%, 2.6% and 6.5%, respectively, on an LTM basis, up from 10.5%, 1.2% and 5% for 2009. The Small Tier also improved in all three metrics on an LTM basis to 16.2%, 7.2% and 9% for gross margin, operating income margin and EBITDA margin respectively, from 14.1%, 5.6% and 7.3% for 2009. Lastly, the Micro Tier improved gross margin and EBITDA margin to 11.4% and 1.7%, respectively, from 11.3% and 1.5%, but declined in operating margin to (1%) from (0.9%).
On a percent change basis comparing the Q2 2010 results with the same period a year ago, in the Large Tier, Jabil Circuit showed the most improvement in operating margin to 2.4% from 1.7%; Nam Tai Electronics led the Mid Tier with operating margin improving to 3.5% from 1.4%; SMTC Corporation led the Small Tier, improving margins to 3.5% from 1.%. Lastly, IEC Electronics led the Micro Tier with operating margin improving to 7.9% from 6.8%.For more information, visit www.lincolninternational.com.