It was before the last recession and fall from “irrational exuberance” that the switch and relay business has seen this level of major companies changing ownership. It started last year with Magnecraft and then Crydom being acquired by Groupe Schneider and SAIA-Burgess became the target of a hostile takeover. At the very end of last year ITT Industries announced the sale of its $350 M switch business. To begin this year Tyco announces the spin-off of their electronics business. 

Why has this activity increased? What has changed and what will continue to change the make-up of the relay and switch industry? Is there going to be more activity in the future? These questions will be discussed after a more detailed review of what has already transpired.

Magnecraft and Crydom Acquired by Groupe Schneider

Groupe Schneider is a global manufacturer electrical and automation products with sales in excess of $12 B. This French corporation has a long history of acquisitive growth. The list of companies they have acquired includes such names as Square-D, Telemecanique, Merlin-Gerin, BEI Technologies, and Kavlico. The acquisition of Magnecraft and Crydom (scheduled to be finalized in Q1 2006) adds to their portfolio of relay and contactor products.

So, why were these companies sold? This question cannot be answered with certainty. However, there are some interesting facts to consider that provide some insight.

The Steinback family started Magnecraft in 1951. It passed from one generation to next in the early 1970s, after which they purchased a series of product lines from various other relay manufacturers. Perhaps this acquisitive growth strategy and the line of Steinbacks to take the helm had come to an end.

Silicon Power Corporation owns Crydom. Silicon Power Corporation was part General Electric until 1994 and their management has a long history of research and development of semiconductors for high power applications. Conceivably the Crydom product line has reached maturity, from an R&D perspective, and proceeds from its sale can fund further new product research.

SAIA-Burgess Saved by A White Knight

During the summer of last year Sumida of Japan made an unsolicited offer to purchase SAIA-Burgess of Switzerland. Sumida’s interest in the acquisition was to gain access to the European automotive market and improve its product offering to Japanese automakers.

The board of directors at SAIA-Burgess was incensed by the offer and quickly waged a battle to convince share holders to vote against the Sumida offer. But the question was never called to a vote. The board found another suitor that was willing to better Sumida’s offer. An offer from Johnson Electric of Hong Kong was more in line with the board’s high value of SAIA-Burgess.

The SAIA-Burgess board embraced the new offer proclaiming that Johnson Electric would allow the company to continue operating autonomously and would give the combined company a superior position as one of the largest suppliers of electric motors to Asian and European car makers. The two companies also had previous joint dealings with each other and with Defond, whose beginnings can be traced to Johnson Electric. The offer was approved by share holders and the deal completed at the end of last year. Shortly after which the chairman and some other top management personnel resigned their positions.

Switches Don't Fit With ITT’s Future Strategies

In a Dec. 16th press release Steve Loranger, Chairman, President and Chief Executive Officer of ITT Industries said the company had concluded a strategic review of the businesses within its Electronic Components segment. 

“After careful analysis and consideration, we have decided to begin the process of divesting our Switches business, which includes the design and production of keypads, dome arrays, interface controls and switches, and in 2005 is expected to generate revenue of approximately $350 million,” Loranger said.  “While the Switches business does not fit within our long-term strategy, we will continue to improve and manage the business to create value until we complete a disposition.  The company will take a special charge of $200-$275 million in the fourth quarter 2005 primarily related to a non-cash asset impairment charge in the Switches business.”

The asset impairment charge may be a reflection of the lower than expected profitability of the products produced and sold by ITT’s switch business, possibly the result of a highly competitive global market and underutilized manufacturing capacity. More will be known when ITT’s fourth quarter 2005 financial statement is released on Jan. 27th.

Unlocking The True Value of Tyco

Dennis Kozlowski’s acquired electronics empire includes the former industry stalwarts Amp, Potter & Brumfield, Raychem, and Thomas & Betts and generated over $12 B dollars in revenue for their last fiscal year that ended Sept. 30, 2005. Earlier this month Tyco announced that the $40 B conglomerate will be broken up into three separate publicly trade corporations in order to “unlock” Tyco’s true value.

It is often hard to understand how the sum of the parts can be worth more than the whole. Perhaps this is a way of shedding excessive book value and slow growth businesses. At the end of their last fiscal year Tyco’s book value was close to 80% goodwill. It will be interesting to see how much of this goodwill is allocated to highly acquired entities. A report in The Wall Street Journal states, “Tyco Electronics, like others in its industry, has seen its profits margins hurt by higher costs for raw materials. Growth has also been slow; revenues rose 3% from fiscal 2004 to fiscal 2005.”  

Another interesting observation is the choice of Ed Breen to command the services and industrial products groups. Given his extensive background in electronics and telecomm/datacomm this appears an odd choice. 

What has Caused this Increase Activity?

Prior to the most recent actions by ITT and Tyco, the acquisition activity appears to be the result of the purchasing companies improving their market position by adding needed products and/or markets. Conceivably, a very competitive market place is the force behind ITT and Tyco divesting of some or all of their electronic components business.

What has Changed and What may Change?

The competitiveness of the relay and switch market has been increasing for years. Many believe a consolidation is necessary to decrease manufacturing capacity and the number of competitors pursuing business. This may come about if another global switch manufacturer purchases ITT’s switch business. Tyco’s spin-off of the electronics component group puts this business in play. It may result in offers to buy part or all of the business generating cash for Tyco and possibly lead to consolidation.

Where will the suitors come from? North America, Europe, or Asia. Saia-Burgess was the target of a hostile take-over attempt by Sumida of Japan and wound up being acquired by Johnson Electric of China. 

Will There be More of These Changes in the Future?

The need for profitable growth, competition from Asian manufacturers, rising material costs, and the shrinking number of manufacturing locations in North America and Europe all contribute to aggressive competition and a complicated global market place. The winners in this market place will be those that can adapt to the fast pace of change and have the tenacity to succeed. The market will force out manufacturers that don’t meet these criteria. So yes, there will be more changes in ownership and consolidation in the relay and switch industry over the coming years.