Tale of Two Deals

Taiwanese electronics giants go M&A-crazy
Jonathan Adams
Newsweek International, July 11, 2005

The urge to merge has gripped so many Taiwanese electronics manufacturers, "it's like a disease," says Y. D. Gordon, manager of THT Research, a Chicago consulting firm. Big mergers are always a dangerous bet, but Taiwanese companies are flush with cash and can't afford to stand still. Many have cut costs to rock bottom by moving production to China. Yet they still see profit margins under pressure, and are seeking relief in two opposite kinds of deals, says analyst Steven Tseng at Yuanta Core Pacific Securities in Taipei: moving up the supply chain by buying companies that supply their components, or downstream into designing and marketing their own gadgets.

Which approach will pay off? Hon Hai, a contract manufacturing giant that makes computers for HP and game consoles for Sony, is taking the upstream route. It has been gobbling up smaller firms and factories from Mexico to Finland, including the Finnish mobile-phone casing-maker Eimo Oyj. Some investors see this approach as a smart way to build a "one-stop shop" for contract customers, a class that includes major brands from Dell to Samsung. Hon Hai chairman Terry Gou says that Taiwanese companies should focus on this traditional strength—behind-the-scenes contract manufacturing at massive volumes and bargain-basement prices—because it's simply too hard to build global brands.

But that's exactly what several others are trying to do. BenQ, another big contract manufacturer, recently inked a deal to take over the Siemens mobile-phone unit as a way to raise its brand profile, a move that puts the company into competition with big contract customers like Nokia. Asustek, too, is stepping up the marketing of its own multimedia phones and laptops, and plans to create an acquisitions war chest.

Investment banks have come down on both sides of this debate. The one thing most agree on is that Taiwan's deals look better than a recent flurry out of China, all focused on building global brands. For example, Lenovo of China recently paid dearly for IBM's long-dead PC business, whereas Siemens is offering to pay BenQ to take over a mobile-phone line that is struggling, but still has valuable technology. Perhaps as long as the Taiwanese don't overpay, they can win with either strategy.

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