Hon Hai will buy Acer spin-off

Hon Hai Precision Industry Co's (鴻海精密) decision to buy a Hsinchu-based networking equipment maker may give the nation's largest electronic components maker a much-desired boost in its competion with local rivals, investors said yesterday.

The deal that Hon Hai announced on Thursday to acquire Ambit Microsystems Corp (國電) "represents a big stride for the company to tap into the networking and communications sectors," said Jones Wang (王源錦), a deputy manager of ABN-AMRO Asset Management (荷銀投信).

Ambit, a spin-off of Acer Inc, makes routers, modems and other networking equipment.

"But the combination may also pose a challenge for local rivals because Hon Hai is well known for cost control ... They are doomed to have a hard time competing with Hon Hai," Wang said.

Wang said some wireless local area network (LAN) equipment makers that focus mainly on original equipment manufacturing (OEM) or original design manufacturing (ODM) services -- such as Askey Computer Corp (亞旭) and Gemtek Technology Co (正文) are expected to be hardest hit by the deal.

Shares of Askey and Gemtek dropped 0.55 percent and 0.82 percent to close at NT$17.9 and NT$60.5, respectively, on the TAIEX. Zyxel Communications Co (合勤) shares declined 1.98 percent to NT$74.

But another analyst said he has a different view about the deal.

"The alliance is more about giving Hon Hai the much-needed design capabilities in communications sector than seeking more orders," said Gary Lai (賴晴風), an analyst with Insight Pacific Investment Research (月涵投顧).

"I don't think local networking equipment makers will see orders drop in the short term because international vendors tend to keep a stable relationship with their suppliers," he said.

Local networking equipment manufacturers have their own strategies and special expertise, which will make it difficult for Hon Hai to squeeze orders out of their hands, he said.

Accton Technology Corp (智邦), an OEM/ODM service provider, focuses on producing high-end switches while Ambit mostly produces low-end ADSL modems. D-Link Corp (友訊) is phasing out the provision of contract manufacturing services, and is gradually shifting it focus to selling its own brand-name WLAN products, according to Lai.

"In my view, Hon Hai can only lure orders from smaller rivals like Belite Technology Co (東訊) by offering lower prices in the tussle," Lai said.

Nonetheless, industry watchers uniformly agreed that the deal is the most effective way for Hon Hai to tap into the expanding networking and communications sectors because it will have a design team and secure orders at the same time.

The alliance, however, came as a shock for most industry watchers because they never expected Hon Hai would target Ambit for a merger.

"It's unimaginable," Lai said. "It surprised me that Hon Hai would buy a well-run company like Ambit."

As an electronic manufacturing services (EMS) provider, Hon Hai has in recent years bought poorly-operated electronics companies and firms in financial trouble, including Pan-International Industrial Corp (廣宇), Q-Run Technology Corp (華升) and CP Technology Co (撼訊).

Investors positively responded to the merger with Hon Hai and Ambit shares surging by 2.6 percent and 7 percent, respectively, to end at NT$158 and NT$98.5 on the TAIEX yesterday.

The Ambit acquisition is the third acquisition deal that Hon Hai has announced over the past month.