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Flextronics Buys Solectron for $3.6 Billion

Flextronics International, the biggest U.S. contract electronics maker, said it will buy rival Solectron for $3.6 billion in cash and stock to cut costs and expand its product line.

The merger between the biggest U.S. companies in the contract electronics industry would create a company with more than $30 billion in annual revenue and a workforce of about 200,000 people, they said.

The deal comes amid intense competitive pressures in the industry, from Asian rivals including Taiwan's Hon Hai Precision Industry, as well as from big-name customers that are squeezing already-thin margins.

"We will be a larger, more competitive company and therefore better positioned to deliver supply chain solutions that fulfill our customers' increasingly complex requirements," Flextronics Chief Executive Mike McNamara said on a conference call.

Under the deal, each Solectron share will be swapped for either 0.3450 Flextronics shares or $3.89 cash. The companies said the Flextronics share swap will be limited to between 50% and 70% of Solectron shares.

The cash price is a 15% premium over Solectron's closing price on Friday. Solectron shares surged . Flextronics fell .

Flextronics is regarded as among the best-run and most-efficient contract electronics manufacturers, making a range of products from mobile phones for Sony Ericsson to Microsoft's Xbox game console and printers for Hewlett-Packard.

Solectron's customers include Alcatel-Lucent and IBM. Mutual customers include Cisco, Motorola, Ericsson and Nortel.

Company officials said the deal combines Solectron's strength in high-end computing, telecommunications, and network infrastructure with Flextronics' expertise in high-volume, low-cost products.

The acquisition comes after Solectron in late March posted a drop of almost 50% in quarterly net profit and said it was cutting jobs and plant space, the second phase of a restructuring plan announced last October.

Solectron also lost Chief Executive Michael Cannon to Dell in February.

Following the acquisition, Solectron will become a wholly-owned unit of Flextronics, and Solectron shareholders will own 20% to 26% of Flextronics' outstanding shares.

Flextronics said the combined entity could cut costs by up to $200 million, although it could take as much as 24 months to integrate the companies.

Flextronics' CFO Thomas Smach said the deal should add at least 15% to the company's earnings per share once all of the synergies are realized.

As part of the acquisition agreement, Solectron has the right to nominate two individuals approved by Flextronics to the board of directors of the combined company.

Shares of some other contract electronics manufacturers rose on news of the deal, with Sanmina-SCI up . Struggling Finnish rival Elcoteq jumped more than 5% on the Helsinki bourse as the deal sparked hopes of an offer for the company.