In 1999, investors eagerly joined the outsourcing trend by pumping nearly $5 billion in new equity and convertible debt into the stock market, as electronics manufacturing services companies began to financially prepare for the OEM industry's accelerated push to outsource.
Fortunately, leading OEMs have increased outsourcing activities significantly. Since mid-1999, EMS companies have logged more than 60 acquisitions. Combined with industry consolidation, more than $13 billion has been contributed to annualized industry revenue.
Among the larger OEMs divesting assembly operations are IBM ($1.5 billion to Celestica), Nortel ($1.5 billion to SCI Systems, $200 million to Sanmina, and $150 million to C-MAC), and Ericsson ($400 million to Solectron). Regarding industry consolidation, a number of significant events have occurred, including Flextronics announcing plans to acquire the Dii Group and Solectron buying Smart Modular. At a rate of about two per week, merger and acquisition activity is keeping the investment community almost as busy as the management teams of the leading EMS companies.
However, the acquisitions tell only a part of the story. Adjusting for the impact of acquisitions, including OEM-plant divestitures, the underlying growth has also been strong, with solid sequential-sales gains in core operations reported or expected for the fourth quarter from all the major domestic EMS companies. Flextronics led the pack with a growth rate of more than 25%, with Dii, Jabil, Sanmina, and SCI each recording estimated gains of 15% to 20%. Furthermore, despite some concerns about the lingering effects of a Y2K buildup, the EMS industry appears to be maintaining its strength as 2000 progresses.
Despite stronger sales and earnings growth, the investment community continues to value the EMS industry at forward P/E multiples near the S&P 500.
And although relative valuations have improved in the past few years, the EMS industry will continue to excite investors for years to come. After all, the electronics industry is only about 20% outsourced, compared with a longer-term OEM outsourcing percentage closer to 70%.