Xbox 360 maker super-sized by mega-merger

Flextronics will acquire its rival, Solectron, to form one of the world's largest contract electronics manufacturers, the company has announced. Flextronics is the unsung maker of many famous products, including Microsoft's Xbox 360 games console.

The new company will have 200,000 employees worldwide The vast majority of them will apparently be production line staff, although there will also be 4,000 design engineers. Flextronics predicts revenues of more than $30 billion annually. The stock or cash deal is currently valued at $3.63 billion.

“The combined company is clearly more diversified and formidable than either on its own,” said Mike McNamara, Flextronics' CEO.

Fierce competition

Singapore-based Flextronics faces increasing competition from Taiwanese rivals Foxconn and Quanta, which have harnessed cheap labor in China to win deals to make notebook PCs and mobile phones, as well as new products like Apple's iPod and iPhone series.

Flextronics has obtained a $2.5bn seven-year unsecured loan from Citigroup to help finance the deal

The deal between Flextronics and Solectron throws light on the often ignored world of Electronics Manufacturing Services (EMS). Major electronic products vendors, such as Apple and Dell do little or no manufacturing of their own. Instead they outsource it to giant EMS firms, in some cases the EMS companies also cooperate on the design of products.

Microsoft contracted three separate firms to build the Xbox 360, for example. Even major Japanese brands, which have long taken pride in their own factories, are beginning to turn to cheaper EMS providers for some products, particularly low end and mature products.

“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,” said McNamara.

The deal is subject to shareholder and regulatory approval.

Further Reading: Flextronics' press release announcing the deal and financial terms (PDF)