By Loren Lancaster Courtesy of EE Times (05/29/2008 10:42 AM EST)

Despite recent headlines depicting a struggling domestic economy, we are actually in a highly active deal era. Even though deal activity has softened a bit in 2008, it still remains at historical highs " driven by an abundance of low cost capital and a strong global economy.

Rapid consolidation in the electronics packaging supply chain

According to a recent study by the Electronics and Semiconductor Group (ESG) at Core Capital Group, consolidation is driven by 17% of the participants. The study found that the electronics and packaging supply chain is undergoing rapid consolidation driven by private equity and strategic interests. Competitive barriers are building and supply chain channels are narrowing, which is impacting a large percent of businesses in the segment.

Supply chain deals in the 21st century

Deal flow in this segment has generally followed the market. Companies from the study reported a record year in 2007, with deal flow reaching 17% of total deals completed since 2000. This year is on pace to match the 2007 levels " however, economic conditions are raising uncertainties.

Nineteen percent of the consolidation is being driven by private equity investors. Private Equity Groups (PEGs) now have over $2 trillion in total funds, and that number will likely double by 2009.

In the past, PEGs viewed the electronics industry as being too difficult to understand and too cyclical. This meant that industry consolidation was on a more "natural" pace, relying on company earnings for investment capital. Now that PEGs are interested in the electronics packing supply chain, the infusion of external capital has significantly increased consolidation pressure in the industry.

Of those companies researched, 52% have executed at least one strategic transaction in their lifetime. Breaking that down further, 21% have done just one deal since 2000, and 17% have completed multiple deals in that time frame.

Hybrid assembly on the move

Within the electronics packaging supply chain, hybrid assembly is currently experiencing a spike in consolidation activity. Electronic circuitry that is built on ceramic substrate (vs. fiberglass) has recently received attention for its renewable properties. In my role as managing director of ESG, I have seen increased interest here. Even though this technology has been around for many years, it is renewable. New product lines such as photonics, among others, rely on the same substrate and heat management technology the hybrid market uses. Ceramic circuit technology is still key in products with high power dissipation and specialized needs such as photonics, sensors and MEMS (Micro-Electro-Mechanical Systems).

The recent activity has been driven by several factors: the desire by companies to outsource non-core competencies, company founders reaching retirement age, and the shift in defense spending away from aircraft and spacecraft due to the Iraq war's need for boots and bullets.

"As I see it, one of the trends is for companies with captive hybrid circuit operations to seek to outsource 'non-core competence' activities," said Ted Myers, president of Micro Hybrid Dimensions, a manufacturer and seller of a broad line of thick film hybrid substrates. "In many cases, a company's hybrid circuit operations fit this model. Simply put, the operations are either consuming an excessive amount of management (and other) resources and/or they are not pulling their economic weight and the firm wishes to re-deploy these resources in more profitable activities."

Next Page