TTM Technologies Merger

November 24, 2009

On November 16, 2009 TTM Technologies (Nasdaq: TTMI) announced that it would be merging with Meadville Holdings Limited. Both companies are in the printed circuit board (PCB) manufacturing business. TTM is the largest PCB manufacturer by revenue in the United States, but was not in the top 10 such companies worldwide. Meadville is listed on the Hong Kong exchange and is somewhat larger than TTM.

TTM has been looking for a Asian acquisition for as long as I can remember. The U.S. PCB industry has been on the ropes for over a decade because of competition from overseas, especially from Asian companies. TTM, and some of its American rivals, have survived and even prospered by specializing in a few areas. One is low volume production where the savings from going overseas are outweighed by the logistics of it. While we tend to think of electronics as high-volume items, in fact outside of the consumer sector often industrial kit is made in low volume.

Another area where some American companies have retained an advantage is high-technology. These are not your Dad's PCBs. They have multiple layers of conductors and insulators and tiny thru-holes drilled with lasers. TTM specializes in high-end boards and provides engineering support to customers.

Quick turn-around time, aka the quick-turn segment, is also quite profitable. This is often for prototypes during the development phase of a project. A company might want ten prototype boards, and it wants them ASAP. TTM does quick turn.

Still, TTM has wanted to be a one-shop solution for its customers. Typically for high volume products, where cost per board is an issue, TTM's customers have gone elsewhere.

Meadville is just what TTM has been looking for, although it is much larger than I expected the acquisition would be. Meadville has good standard technology capabilities, so it will benefit from TTM's cutting edge ability. Meadville has the high-volume capacity that will allow TTM to become a one-stop shop. Meadville has a variety of factories in various locations in China.

Merged into TTM, the companies will form the third largest PCB company in the world. Meadville will be spinning off its PCB laminate manufacturing division as part of the deal.

Meadville has a lot of debt that enabled it to acquire the capital equipment and smaller companies it needed to expand rapidly. New credit facilities of $582 million are being provided by Hong Kong banks. However, both TTM and Meadville have been generating cash, even during the recession, so on first impression it seems they should be able to pay down the debt over time without too much difficulty.

TTM is buying Meadville with cash and common stock. As a result Meadville investors will own about 45% of the merged company.

Due to the large number of PCB companies in the U.S., this merger is not likely to be seen as anti-competitive by U.S. regulatory agencies. However, issues arise because a significant proportion of TTM's business is from defense contracting. The Department of Defense and the Committee on Foreign Investment in the U.S. (CFIUS) must approve the deal before it goes through. Management did not think that would be a problem once protocols were established to keep Defense information secure. But one analyst at the conference claimed the largest Meadville stockholder is "close to" the Chinese Communist government, and rather than asking management a question seemed to be saying she (or whoever was using her, possibly Taiwanese interests) thought the merger should be disallowed by CFIUS.

Mergers are always tricky, but I believe TTM has been very cautious in looking for this acquisition and has done its due diligence. It will probably take a good year or so after the merger, however, before we see any result of its synergies.

For a report on TTM's latest financial results, see my TTMI Q3 2009 analyst conference summary. Also see TTM Technology press release on Meadville Holdings merger.

And of course Meadville Holdings Limited.

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Copyright 2009 William P. Meyers