This Merger Wasn't Rocket Science

By Timothy Roche

Not much went right when the chief executives of the world's fourth and fifth largest contract manufacturers started discussing a potential marriage three months ago. The hotel conference room where they met near the Phoenix, Ariz., airport was cramped and seriously lacking in air conditioning. Even the bottled water was too warm to drink as Randy Furr, president and COO of Sanmina, made the pitch for his younger firm, then worth $7.7 billion, to buy SCI, then worth $4 billion, and considered a pioneer in the fast-growing business of manufacturing tech hardware for name-brand companies like Dell, Hewlett-Packard and Nokia. After nearly a day's wrangling, Furr could not get Eugene Sapp, chief executive officer of SCI, to agree on anything, except that they would meet again.

But after eight weeks of dickering, the deal got done--as both companies recognized that it was the only way they could compete against larger rivals Solectron and Flextronics. SCI, with $9.1 billion in sales last year, mainly assembles PCs and telecom gear, using relatively low-paid labor in countries like Mexico and Malaysia. Sanmina manufactures more complex switches, routers and optical-networking equipment for the likes of Cisco, Alcatel and Motorola, often using skilled labor or factories equipped with robots and lasers. If the merger is approved, as expected, by shareholders and regulators in the U.S. and Europe, the combined company will employ 50,000 workers at 100 plants in 21 countries.

The plan is to expand rapidly, given the bargain prices available these days for factories and other manufacturing assets. And the combined company expects to save $100 million to $150 million a year, as it consolidates manufacturing and management. Says Furr: "If you look at where our strengths are, this combination is a perfect fit of global size and terrific young management in a business that is just going to keep growing."

That's terrific for Furr and his boss, Jure Sola, who will run the company after Sapp retires next year. But it is the end of an era for the old hands at SCI, formerly Space Craft Industries. The Huntsville, Ala., company was founded in 1961 by Olin King, a former NASA engineer who subcontracted for the space agency. SCI evolved into a major manufacturer of PCs and then, under Sapp, who became CEO in 1999, diversified into optical and wireless technology. In fact, at the nadir of the current tech slump, the company in March bought Nokia factories in Finland and Britain, and in June announced that it would triple the capacity of a factory in China that makes optical devices for Hitachi.

SCI missed the boat when networking and telecom companies like Cisco became the largest customers for the EMS industry. Leading competitors like Flextronics and Sanmina, says Merrill Lynch analyst Jerry Labowitz, grew at a faster pace, pursuing diverse acquisitions while SCI was busy trying to add optics and networking companies--now suffering heavily from overcapacity--to its PC and cell-phone business.

The combined Sanmina and SCI, however, will be well positioned to challenge the industry's top players. The new company will offer a powerful mix of full-service manufacturing, from low-end components to high-end finished products. It will make everything from glucose meters to computer printers and cellular base stations. In any given week, its anonymous factories will produce as many as 5 million units of high-tech gadgetry--all bearing other companies' names.

--By Timothy Roche. Reported by Frank Gibney Jr. and Laura Locke/San Francisco and Collette McKenna Parker/Huntsville

With reporting by Frank Gibney Jr. and Laura Locke/San Francisco and Collette McKenna Parker/Huntsville