With conditions in the passives sector not expected to show any marked near-term improvement, could a round of acquisitions be far behind?
While some suppliers don't feel threatened, industry observers say that continued downward pressure on passive component prices and profits could force out smaller suppliers within the next six months, or cause them to be acquired by larger companies.
"A lot of consolidation has already taken place," said Steve Wade, director of sales and marketing at IRC Inc., a Corpus Christi, Texas, resistor supplier and subsidiary of England-based TT Electronics Inc. "But we're always looking for bolt-on acquisitions that add to our technology offerings," he said.
Both the capacitor and resistor markets have hundreds of companies that play in various product sectors. In some key areas, such as ceramic and tantalum capacitors and chip resistors, a handful of large suppliers with annual revenue of more than $100 million tend to dominate the market, according to Shawn Wood, an analyst at iSuppli Corp., an El Segundo, Calif., market research and supply chain services firm.
Despite a recent uptick in orders, the passives market remains weak. Average selling prices of capacitors and resistors have fallen at least 5% a quarter since the beginning of the year, said iSuppli in a recent study, with some prices down as much as 30%. With parts already selling at or close to margin, prices are expected to level off next year.
Inventory levels, too, remain a problem. "Inventories are coming
down to near normal levels at OEMs and depleting at EMS providers and distributors, but they're still languishing at suppliers," Wood said.
With many passives suppliers expected to experience year-over-year revenue reductions averaging 26% to 34%, poor market conditions persisting into early next year could threaten many smaller capacitor and resistor vendors, according to iSuppli.
Another analyst, Ted Kundtz of Needham & Co. Inc., New York, agreed that consolidation will increase. "I think the acquisitions will be of smaller, mostly private companies that we don't hear much about," Kundtz said. "Clearly, there's more pressure than ever to consolidate. As outsourcing continues, EMS players get larger and gain buying power. They want to deal with fewer suppliers."
Some smaller suppliers have already folded or are in trouble.
Aerovox Inc., a New Bedford, Mass., supplier of electrolytic and film capacitors, filed for bankruptcy in June after several years of poor earnings. The company in April had engaged investment firm Loeb Partners Corp. of New York to determine whether it will be sold or can gain additional financing, said F. Randal Hunt, senior vice president of finance and the company's chief financial officer.
In July, Intarsia Corp., a Fremont, Calif., supplier of integrated passives, had its operations suspended by its primary joint venture parent, materials company Dow Chemical Co., due to high development costs and the industry downturn.
But other passives suppliers don't plan to throw in the towel just yet. While acknowledging that weak business conditions have forced them to cut costs, these suppliers say they've targeted more business at niche markets to avoid competing directly with the larger suppliers in the communications and computer markets.
One supplier, ITW Paktron, which specializes in metalized film capacitors, has seen weakness in its telecom sector, mostly in 48V power systems. However, the company has refocused its business more on the automotive and industrial-control areas.
"We've stayed out of the low-cost ceramic and tantalum chip capacitor markets," said Ian Clelland, vice president and general manager of the Lynchburg, Va., company.
ITW Paktron, which was named as a possible acquisition target, is not up for sale, Clelland said.
Ohmite Corp., a Skokie, Ill., supplier of thick-film wirewound resistors, also believes its niche market strategy will keep it afloat. Although dwarfed by larger suppliers, Ohmite has strengthened its market presence in recent years by acquiring several smaller rival suppliers of wirewound resistors, said Kirk Schweibert, director of sales and marketing.
Nevertheless, Ohmite, which does about 25% of its business in computers and communications, has transferred some production to Mexico and reduced its workforce in response to slowing business conditions. But Schweibert said the company's focus on a mature segment with low growth potential will not likely appeal to larger suppliers.
Still, larger passives suppliers might find acquiring a smaller company at bargain prices appealing as they try to strengthen themselves for an eventual market upturn despite poor recent performance, analysts said.
"The poor earnings of some of these companies hinders the ability to use stock for acquisitions, but they have strong balance sheets," said Shawn Severson, an analyst at Raymond James & Associates Inc., St. Petersburg, Fla. "They will likely acquire companies."
Additional reporting by Robin Lamb