The combined company will have the broadest worldwide EMS capabilities, from design resources to end-to-end vertically integrated global supply chain services, which will enhance its ability to design, build, and ship a complete package product for its OEM customers. By combining Solectron's resources and unique skill sets, Flextronics will be able to provide more value and innovation to customers by leveraging the combined global economies of scale in manufacturing, logistics, procurement, design, engineering and ODM services.
The enhanced capabilities of the combined company will create more value for its customers and increase their competitiveness by improving their product development process and supply chain management, while also delivering improved product quality with improved performance and faster time to market.
Operating in 35 countries, with a combined workforce of approximately 200,000 employees, including approximately 4,000 design engineers, the combined company's annual revenues will exceed $30 billion across seven well-diversified customer market segments and several vertical component divisions.
Transaction Terms
Under the terms of the definitive agreement, unanimously approved by the boards of directors of both companies, shareholders of Solectron will receive total consideration currently valued at approximately $3.6 billion, based on the closing price of Flextronics ordinary shares on June 1.
Each share of common stock of Solectron will be converted into the right to receive, at the election of each of the individual holders of Solectron shares, either, but not a combination of (i) 0.3450 shares of Flextronics or (ii) a cash payment of $3.89 per share, subject to the limitation that not more than 70% in the aggregate and no less than 50% in the aggregate of Solectron shares will be converted into shares of Flextronics.
As a result, if holders of more than 70 percent of Solectron's outstanding shares elect to receive Flextronics stock, the shares of those holders to be converted into Flextronics stock will be proportionately reduced so that not more than 70 percent of Solectron's outstanding shares in the aggregate are converted into shares of Flextronics stock, with those holders' remaining shares converted into cash. In this case, Solectron shareholders electing cash consideration will receive cash consideration for all their shares.
Alternatively, if holders of more than 50 percent of Solectron's outstanding shares elect to receive cash, the shares of those holders to be converted into cash will be proportionately reduced so that not more than 50 percent of Solectron's outstanding shares in the aggregate are converted into cash, with those holders' remaining shares converted into shares of Flextronics. In this case, Solectron shareholders electing stock consideration will receive stock consideration for all their shares.
In no case (other than by virtue of fractional shares) will shareholders who elect to receive the stock consideration receive less than 70 percent of their total consideration in Flextronics stock. Alternatively, in no case will shareholders who elect to receive cash consideration receive less than 50 percent of their total consideration in cash.
Based upon Solectron's 909.2 million shares and share equivalents outstanding on March 2, 2007, the range of cash to be paid and shares to be issued by Flextronics is as follows:
Total Value
Maximum Cash Payments (assuming 50%
of consideration paid in cash) $ 1,768,419,886 $ 1,768,419,886
Minimum Number Flextronics shares
to be issued (assuming 50% of
consideration to be paid in stock) 156,839,296 $ 1,835,019,761
Total value as of June 1, 2007 $ 3,603,439,647
Minimum Cash Payments (assuming 30%
of consideration paid in cash) $ 1,061,051,932 $ 1,061,051,932
Maximum Number Flextronics shares
to be issued (assuming 70% of
consideration to be paid in stock) 219,575,014 $ 2,569,027,665
Total value as of June 1, 2007 $ 3,630,079,597
The cash consideration represents a premium of approximately 15 percent and the stock consideration represents a premium of approximately 20 percent over Solectron's closing price of $3.37 on June 1.
While Flextronics will continue to evaluate alternative long-term financing arrangements, Citigroup Global Markets Inc. has committed to provide Flextronics with a $2.5 billion seven-year senior unsecured term loan to fund the cash requirements for this transaction (including the refinancing of Solectron's debt, if required). Following the acquisition, Solectron will become a wholly owned subsidiary of Flextronics, and Solectron shareholders will own approximately 20 to 26 percent of Flextronics's outstanding shares.
As part of the agreement, Solectron has the right to nominate two individuals approved by Flextronics to the board of directors of the combined company. The transaction is subject to customary closing conditions, including shareholder approvals of both companies, certain regulatory approvals and other customary closing conditions. The acquisition is expected to close by the end of calendar year 2007. Until the acquisition is completed, both companies will continue to operate their businesses independently.
Mike McNamara, chief executive officer of Flextronics, said, "Solectron is an extremely important strategic addition to Flextronics and this combination transforms the landscape of our industry. By joining forces, we expect the increased scale will enable us to further extend our market segment reach and leverage an increased vertical integration opportunity, realize significant cost savings, and better serve the needs of our combined customers, employees and shareholders. Solectron's strength in the high-end computing and telecom segments will be an invaluable addition to Flextronics's existing capabilities and the combined company will be a market leader in most product market segments. We will be a larger, more competitive company and therefore better positioned to deliver supply chain solutions that fulfill our customers' increasingly complex requirements. The breadth and depth of the combined company significantly leverages our vertical integration capability while taking significant costs out of the combined company's infrastructure. The combined company is clearly more diversified and formidable than either on its own, and we are better positioned to increase shareholder value through greater cash flow and earnings. We are thrilled to add Solectron's customers and employees to our organization."
Paul Tufano, executive vice president and interim CEO of Solectron, said, "Flextronics's proven track record, complementary market positions, strong balance sheet and stellar reputation as a global leader in electronics manufacturing services make the combination attractive for our customers, shareholders and employees. Specifically, the transaction will provide Solectron's customers with an enhanced portfolio of design and vertically integrated capabilities, greater scale, and expanded supply chain leverage along with the advantages of an increased low cost global footprint. Combining these two companies allows us to transcend what we have accomplished individually and significantly reshapes and reenergizes our industry. We believe Flextronics has the large scale integration expertise and systems infrastructure capable of successfully integrating and managing the combined company to ensure all of the significant synergies are realized. Flextronics is the best strategic partner for Solectron, and we are extremely excited about the potential of this combined company going forward and the value creation that it represents. Moreover, with the significant stock component offered in the transaction, Solectron's shareholders have a meaningful opportunity to participate in the realization of that value."
Added McNamara: "Over the last 18 months, we have reorganized our management structure to create the infrastructure required to effectively and efficiently add scale to our operations. As a result, we are well prepared to achieve the expected synergies by successfully integrating our new partner into our company."
Financial Expectations
Thomas J. Smach, chief financial officer of Flextronics, stated, "While some synergies will be achieved in the first 12 months after closing, it could take up to 18 to 24 months to fully integrate this acquisition and realize the full synergy potential, which we estimate to be at least $200 million after tax. This should be at least 15 percent accretive to Flextronics's earnings per share (EPS) once all of the synergies are realized. As the integration progresses and actual synergies are realized, we expect to raise our EPS expectations as the accretion occurs over the 18- to 24-month integration period. Although restructuring charges are expected to result from the integration of the acquisition, Flextronics expects to generate cash flow synergies well in excess of the cash portion of such restructuring charges.
"This combination is expected to create customer benefits, cost reductions and synergies neither company could have achieved on its own."