Solectron/Flextronics Merger Analysis

The overlap in the Solectron Corp (SLR) - Flextronics (FLEX) combination is of the broader variety: Electronic Manufacturing Services [EMS]. It is, to say the least, a complex industry in terms of products and services involved, yet it is also one in which consolidation has been anticipated for quite some time.

The key for this deal with respect to competition reviews is the fact that Foxconn International Holdings surpassed both SLM and FLEX for market leadership over the course of the last two year. As the chart below illustrates, Foxconn has experienced remarkable growth in the EMS field, while the other players (excluding Jabil (JBL)) have seen marginal changes in there annual sales:

More importantly, the combined SLR-FLEX entity will clearly remain the number two EMS provider based on annual sales data, remaining a sizable distance behind Foxconn -- at least in the foreseeable future.

In short, this deal will obtain HSR clearance (and EU if necessary), without much difficulty. However, it must again be stated that the offerings involved here are very complex and this does raise the possibility of some mild FTC interest, particularly if the regulator feels the need to educate itself on the EMS market via this deal. The key factor in this concept is that the EMS segment has become extremely top-heavy over the last few years, with the top ten companies (listed above) commanding more then 80% of the overall market. If consolidation is imminent, this would be the ideal transaction for the FTC to take a look at the products/services and market dynamics in anticipation of future mergers.

Naturally, there is no way to handicap the possibility of this type of scenario occurring. The point is that if an HSR re-filing, or even second request, occurs here, it should be viewed as strictly 'educational' in nature and in no way related to antitrust concerns.

It will also be noted that the current DOJ/FTC has rarely issued second requests purely for educational purposes in comparison to the previous FTC where a deal like this would be a strong candidate for a second request.

Thus, it is highly likely (+/-90%) that HSR and EU clearance will be obtained without any review extensions.

Additional research and analysis will be posted shortly.

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