Contract houses expanding: Solectron buying Force

Electronic News, Sept 30, 1996 by Cynthia Bournellis

Milpitas, Calif.--The outsourcing beat raged on last week when contract manufacturer Solectron agreed to acquire Force Computers, Inc. for $187 million in stock.

The merger comes as no surprise to analysts. "This (outsourcing market) has seen a hockey stick effect since 1994," said Sandra Fox, VP of Technology Forecasters, Inc., a marketing firm in Berkeley, Calif. that covers the contract manufacturing industry. "It's a low-margin business and a very tough industry for OEMs to be in."

The deal, which is scheduled to close in early November in the form of a pooling of interests merger, will benefit OEMs by helping them quicken their products' time-to-market and lower life-cycle costs. Solectron said the result of the merger will be a strong team, providing OEMs with a variety of services such as design, prototyping, software drivers, manufacturing and materials management.

Force Computers designs and manufactures systems and boards for embedded VMEbus applications. This legacy bus architecture has been the company's core business. Force has more than 14 years of experience delivering embedded products based on Sparc, Pentium, Pentium Pro, PowerPC and 68000 microprocessor technologies. The company has particular expertise in control and communications applications.

This year, in response to customer demands for faster time-to-market, Force introduced a variety of new products. The company's new VME-based systems--Megaforce, Teleforce and Miniforce--are aimed at the telecom market and are designed for new equipment building systems (NEBS) and rugged environments. In addition, Force released BusNet, a software communications protocol for high-speed network communication between multiple CPU boards.

Earlier this month, Force addressed the CompactPCI market, an area in which design engineers have been clamoring for support. The company launched its Pentura line of CompactPCI products designed to leverage desktop PC applications into the embedded systems market. "This new product line will take us into some very interesting applications," said Chris Williams, director of marketing at Force. The first set of Pentura products is slated for release during Q4.

Not only will the merger allow both Solectron and Force to enhance their respective capabilities and positions in the electronics outsourcing market, it will also help both companies fill their respective gaps: Solectron in the design area and Force in the area of large-volume opportunities. "Our OEMs want us to take over their manufacturing from the schematic or concept phase," said Mark Holman, director of marketing and corporate business development at Solectron. "We do integrated design on a limited basis, such as board-level communications interface cards and board layout, but we haven't done much full systems design."

While 90 percent of Solectron's revenues comes from its printed circuit board assembly business (10 percent, or $300 million, comes from full systems assembly), the company sees a significant opportunity to make money in the design area. Roughly 80 percent of manufacturing costs are backed into product design, according to analysts. "If we can't get in at the design stage, then we can't add value," said Mr. Holman.

The Force deal is Solectron's seventh acquisition since 1995. Both companies began discussing a possible merger six months ago. "Force wanted to expand their company, either through a partnership or an IPO," explained Mr. Holman. Rather than go with an initial public offering, Force decided a strategic partnership would be more beneficial, because it would give them better access to capital for the delivery of high-volume products, particularly in the telecommunications area.

Force's major telecom customers are AT&T, Alcatel, British Telecom and Ericsson. "When we were in our large telecom accounts, we found that they wanted us to deliver, for example, 40,000 LAN cards a year," noted Mr. Williams. "Now with the merger, not only can we can design it, but Solectron can build it."

At the close of the merger, Force will become a subsidiary of Solectron, reporting to Solectron CEO Koichi Nishimura. Solectron decided to make Force a subsidiary for a number of reasons. Said Mr. Holman, "Our internal culture is one of strong entrepreneurship. We have 18 buildings on our campus. Each one is a separate profit-and-loss center. We like to give the folks at each operation a feeling that they own their own business.

"Another reason for our subsidiary strategy is that we don't want to destroy the 'secret sauce' that came with each company, that is, we don't want to strip away who they are."

Force will stay at its current facility in San Jose, Calif. The merger will likely result in an increase in Force's design engineering staff, said Mr. Williams. Force's CEO Sven Behrendt will remain in his current position, with the option to join Solectron's board of directors.

The long-term trend for OEMs to outsource will continue. On the same day Solectron and Force announced their intentions, Sanmina reached an agreement to acquire most of the assets of Lucent Technologies' Custom Manufacturing operation in Greensboro, N.C. (see adjacent story).