North American firm buys Asian management

Is this a first?

In a deal that shows that M&A can go into Singapore as well as out of it, the world’s third largest electronics manufacturing services (EMS) company, Celestica, has bought Singapore’s Omni Industries. With a deal struck 50% in shares and 50% in cash, the total consideration is S$1.6 billion ($880 million).

What is most encouraging about the deal is that the Canadian company has bought Omni as much for its management expertise as anything else.

“The primary attraction of this deal was getting the management," says Anand Kumar, a Morgan Stanley executive director, and an advisor to Omni.  "This is a management team that has built up a $1 billion customer base from scratch, and been shortlisted by some of the biggest OEMs [original equipment manufacturers] as preferred suppliers. They have demonstrated a really strong capacity to build plant, scale them up and make them profitable in a shorter time than many US firms.”

Omni has demonstrated that it is able to secure land and build a plant in China; get it operational and working at full capacity – and do so faster than many members of its peer group. Given the future trend towards outsourcing of production (particularly in China), this is an important track record.

EMS companies such as Omni are the outsourcing engines of the new economy. They fabricate anything from mobile phones and computer printers for OEMs such as Hewlett Packard and Motorola, which design the products and then market them.

However, Omni was keen to do a deal because it was aware that global trends would eventually work against its medium size. OEMs are becoming keener to deal with fewer EMS relationships in order to improve quality control, and delivery times -- and that eventually would have led to Omni’s marginalization. With this deal, it will now be part of a global group. Meanwhile, Celestica gets a firm that will allow it to expand its operations in Asia with confidence.

Omni’s senior management team founded the company eight years ago and all came from Hewlett Packard. The leading light today is Li Kim Bock, the CEO.

“This is a rare example of a North American company buying an Asian company for its management team,” says CSFB’s head of M&A, Jeremy Mead, which advised Celestica.

The management will be healthily compensated in the deal. The five senior managers own 7% of the company and will take $60 million from this transaction. That will be partly paid now, and partly over two years in a staggered lock-up. However, the management will also be given shares options in Celestica to ensure their long-term commitment to the new group.

Apart from excellent management, Omni has two plants in China (opened within the last two years) plus plants in Singapore, Thailand, Malaysia and Bintang.

Says Mead: “This should be seen as a positive deal for Singapore and Asia, as it suggests more outsourcing production will move to the region.”

The sale took Morgan Stanley the better part of six months to complete thanks to the re-rating of the technology hardware sector in the fourth quarter of last year and the first quarter of 2001. However, EMS stocks surged in April, and the firm took advantage of this window of opportunity to invite bidders back to the table.

Says Morgan’s head of Singapore corporate finance, Michael Tien: “The challenge involved in this deal was maintaining competitive tension in the auction through the highly volatile technology sector in the fourth quarter of 2001 and the first quarter of this year. We settled on a deal structure with a hybrid consideration of half cash/half Celestica stock. Investors of Omni would have downside protection through the cash portion, and would be exchanging stock from a regional EMS leader to that of Celestica, a global winner, at a blended premium of 49.5% to the unaffected price.”

The independent financial adviser to the independent directors was ANZ Investment Bank.

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