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Hon Hai bolsters design capability with Ambit deal

"I believe it's the right move, as the networking and broadband industries are very promising."

Terry Gou, Hon Hai chairman

Hon Hai Precision Industry Co (鴻海精密), a leading electronics component maker, expects its networking business to take a bigger portion of sales as it tries to diversify product lines, a company official said yesterday.

The diversification will partially be the result of Hon Hai's acquisition of Taiwan's largest networking equipment maker, Ambit Microsystems Corp (國電), Hon Hai chairman Terry Gou (郭台銘) told shareholders.

Hon Hai announced early last month it would acquire Ambit, a spin-off unit of local computer-maker Acer Inc, thereby aiming to tap into the networking and communications sectors. Yesterday, Hon Hai shareholders gave the nod to the board's acquisition proposal of Ambit. Each Ambit share will be swapped for 0.672 of a Hon Hai share.

"The sales percentage from the networking business will increase and will comprise a very important portion of Hon Hai's sales in the future," Gou said.

Hon Hai, the nation's largest private manufacturer by sales, will develop a clearer picture of the expanded networking system group's sales contributions in the second quarter of next year, Hon Hai chief financial officer Huang Chiu-ling (黃秋蓮) told the Taipei Times.

Huang said the networking business currently accounted for only a "very small" share of the company's total sales.

As the merger will take effect in mid-March of next year, Gou said the synergy generated won't emerge until as late as the fourth quarter of next year. With a big chunk of its sales generated from personal computer manufacturing, Hon Hai needs to diversify its product lines, he added.

Betting on the promising wireless and broadband industries, Hon Hai is planning to roll out networking equipment and wireless communications products, Gou told shareholders, without elaborating.

"I believe it's the right move, as the networking and broadband industries are very promising," Gou said.

The acquisition is a win-win situation, as it will fill Hon Hai's lack of design capabilities in the networking industry, and Ambit will see shipments surge with Hon Hai's manufacturing strength, Gou explained.

Gou's view was in line with one analyst's prediction.

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

Hon Hai, which primarily produces switch routers, will be able to provide a full-range of products including local area network (LAN) equipment, XDSL equipment and inverters following the acquisition, the company said.

To dismiss widespread speculation that the differences in corporate culture could result in the loss of Ambit's existing design team, Gou said Hon Hai has already secured most of the engineers.

Lee Kung-lu (李光陸), Ambit's design team leader, agreed to stay with Hon Hai, and most of his teammates will follow suit, Gou said, saying the corporate culture will not be an obstacle.

Lee and Lu Fang-ming (呂芳銘) will jointly lead the new Networking System Group, Gou said. Lu has played a key role in pushing for the merger, according to Gou.

Hon Hai earned NT$6.47 per share in the first quarter. Earnings-per-share stood at NT$8.78 last year. Shares of the company rose by 0.38 percent to end at NT$133.5 on the TAIEX yesterday.

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

In addition to acquiring Ambit, Hon Hai also purchased two factories from handset maker Eimo Oyj and Motorola Inc in Mexico to speed up Hon Hai's entry into the mobile phone market.
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