Merger speculation boosts Hon Hai, Quanta

Shares of Hon Hai Precision Industry Co (鴻海精密), the world's leading electronics manufacturing service (EMS) provider, and Quanta Computer Inc (廣達電腦), the world's largest notebook maker, rose yesterday after reports that the two firms could merge.

Hon Hai's shares advanced NT$6.50, or 3 percent, to NT$221 on the Taiwan Stock Exchange, while Quanta's shares closed up 1.8 percent at NT$46.9.

"A merger between Hon Hai and Quanta is unlikely to happen, as we do not see any advantages from such a deal," Jamie Wang (王菊梅), an analyst from Gartner Inc Taiwan, told the Taipei Times yesterday.

Hon Hai would not want to jeopardize its stable relationship with Quanta, to which it sells components such as cables and connectors, she said.

Though Hon Hai in recent years has embarked on a slew of mergers and acquisitions to boost profitability, merging with Quanta would not appreciably boost profits, she said.

Hon Hai reported after-tax earnings of NT$2.43 per share in the first quarter, compared to Quanta's NT$0.85 per share, according to statistics from the Taiwan Stock Exchange.

Rumors of a merger began on Monday as a result of a speculative report released by Kent Chan (陳衛斌), an analyst with Citigroup Global Markets Asia. The story received widespread coverage in the Chinese-language media the following day.

The Citigroup report said that a merger between Hon Hai and Quanta would result in the formation of an Asian EMS/original design manufacturing (ODM) juggernaut.

The merged entity would have a combined market capital of nearly US$30 billion, with the potential for sales of US$74 billion and a net profit of US$2.7 billion next year, according to the Citigroup report.

"Although it may be premature to conclude the impact of a potential combination, we argue that change and consolidation is necessary in Taiwan's ODM/EMS sector," Chan said in the report.

Should a Hon Hai-Quanta merger be completed, a chain reaction would occur, as CEOs such as Ray Chen (陳瑞聰) of Compal Electronics Inc (仁寶電腦) would be forced to respond, Chan wrote.

Compal is the world's second-largest notebook maker, after Quanta Computer Inc.

Even if the deal were to fail, Chan said, there could still be some sort of strategic consolidation between the two to improve competitiveness.

Both Hon Hai and Quanta denied they were considering a merger.

In a shareholders' meeting in June, Hon Hai chairman Terry Gou (郭台銘) said he had previously told Quanta chairman Barry Lam (林百里) that Hon Hai would never move into notebook manufacturing.

Although a merger remains highly unlikely, Wang said Hon Hai was nonetheless trying to fend off intensified competition from Asustek Computer Inc (華碩電腦), as the world's largest motherboard maker has similar business interests to Hon Hai.

For example, the companies' "Asus" and "Foxconn" brands are competing head-to-head in China.

"Asus projects a high-quality image, but Foxconn is gaining ground with a low-price strategy in a market that is sensitive to pricing," Wang said.