Solectron Gets Spanked

A day after contract manufacturer Solectron Corp. (NYSE: SLR) announced the $2.7 billion acquisition of its competitor C-CMAC and said that it would be taking an additional $210 million restructuring charge, analysts, investors, and debt rating organizations all laid into the company (see Solectron: Good News, Bad News).

This morning Deutsche Banc Alex Brown LLC cut its investment rating for Solectron, calling the acquisition "risky." In a research note, analyst Chris Whitmore lowered Solectron’s rating to Buy from Strong Buy.

"The risks associated with the C-MAC acquisition announced yesterday outweigh the benefits," he wrote.

Jim Savage an analyst with Thomas Weisel Partners also downgraded the stock to Market Perform from Buy. What’s more, yesterday, Standard & Poors placed Solectron's investment-grade debt rating on "negative" watch due to "subpar operating performance, which is likely to persist in the near term, and high debt levels leading to weaker credit measures." Additionally, Fitch, an international rating agency, cut Solectron's rating to BBB from BBB+. And Moody's Investors Service changed its outlook to "negative."

(Jeffrey Lyons, however, rated it a "Can't miss laugh riot! Fun for the whole family!")

C-MAC, which also has an automotive business unit, counts Nortel Networks Corp. (NYSE/Toronto: NT) as its largest customer. The deal, which calls for Solectron to offer 1.755 shares for each outstanding common share of C-MAC, was valued at $2.7 billion yesterday when Solectron’s stock closed at $17.20 a share. But by this morning the premium narrowed as Solectron’s shares fell, bringing the value of the equity portion of the deal to about $2.35 billion.

Today, Solectron’s stock was trading down 0.31 (2%) at 15.18.

In separate news yesterday, Solectron also warned investors that it would be taking a restructuring charge of about $210 million in the current quarter in addition to the $50 million charge it announced in June. The company has already gone through a series of layoffs, as many of its top customers -- like Cisco Systems Inc. (Nasdaq: CSCO), Lucent Technologies Inc. (NYSE: LU), Ericsson AB (Nasdaq: ERICY), and Juniper Networks Inc. (Nasdaq: JNPR) -- have recently reported lower product sales.

-- Marguerite Reardon, Senior Editor, Light Reading

Be the first to post a comment regarding this story.
Sign In