Why a Hon Hai, Quanta merger likely won't happen

Why a Hon Hai, Quanta merger likely won't happen

Merger could create the world's largest maker of desktop and laptop computers

Rumours of a tie-up between the world's largest desktop PC manufacturer and the biggest notebook maker resurfaced again after the resignation of a key executive at Quanta Computer, but analysts said such a union could threaten major vendors such as HP and Dell, and that the big US companies have the power to stop such a deal.

The president of laptop maker Quanta Computer, Michael Wang, resigned August 24 after months of speculation he planned to leave the company. In a farewell letter to employees, the popular executive raised the issue that "it is better to have Hon Hai as an ally than an enemy," reigniting market speculation of a possible merger (M&A) with Hon Hai Precision Industry.

While a merger could create a company able to drive down costs by wrangling volume discounts out of component suppliers, it would also be the world's largest maker of desktop and laptop computers. The concentration of so much manufacturing power into one company could threaten major PC vendors in several ways, including the prospect that the company could drive competitors out of business and then raise prices, analysts said.

That's why PC vendors, including Acer and Lenovo Group, would likely move to block such a tie-up, and they can do so by giving and taking away lucrative orders, said Vincent Chen, PC industry analyst at CLSA Emerging Markets in Taipei.

Major PC vendors have several choices when placing orders for new desktops, laptops and other gadgets, and have used this leverage to squeeze out rock-bottom prices for assembly. Quanta's gross margin, an indication of how profitable a company is, was just 4.1 per cent in the second quarter, compared to 19.9 per cent for Dell and 14.9 per cent for Lenovo, in their most recent quarters.

"There are too many other contract manufacturers for them to choose from," PC industry analyst at Macquarie Equity Research in Taipei, Daniel Chang, said. PC vendors diversify their risk and keep prices down by farming out production to several contract manufacturers, and they would punish Hon Hai if it bought Quanta by shifting orders away, he said.

Dell and HP could not be reached for comment, while Lenovo was unable to immediately reply and Acer declined to comment.

Hon Hai and Quanta have denied the M&A rumours numerous times publicly, including in a few strongly worded statements.

In six statements filed to the Taiwan Stock Exchange, Hon Hai has denied any inkling of talks to merge with or take over Quanta. Its most colorful statement, from July 10, said it "vehemently refutes and ridicules for the fourth time the unfounded market rumors on a Hon Hai-Quanta merger," while its most recent statement, dated Aug. 28, is shorter, simply denying a local newspaper report speculating on a deal.

Quanta has made similar denials. At a news conference last Friday, Vice Chairman C.C. Leung said there is no M&A plan with Hon Hai. Quanta plans to continue to improve its relationship with Hon Hai in the future, just as it does with all of its suppliers and customers, he added.

Hon Hai is the world's largest contract electronics manufacturer, assembling goods ranging from Apple iPods to Nintendo Wii game consoles and Nokia mobile phones. The company and its affiliates, including Foxconn International Holdings, manufacture more PCs, mobile phones and networking gear by contract than any other company.

Speculation that Hon Hai might buy Quanta cropped up in part because the laptop segment is the only major electronics area Hon Hai isn't involved in directly, and could provide a major new growth driver for the company. Chang predicted Hon Hai will likely start manufacturing laptop computers within the next few years, but likely won't buy out another major rival to do so.

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