Flextronics International Ltd, the second-biggest contract electronics manufacturer, and Motorola Inc said they're changing the terms of a US$30 billion, five-year agreement because of weaker-than-expected demand.
The companies are removing the volume incentives and five-year term of the deal, in which Flextronics makes mobile phones, pagers and other devices for Motorola. Flextronics also will pay US$112 million to buy back a 4.6 percent stake that Motorola bought at a discount for US$100 million under the May 2000 agreement. The changes don't affect any current manufacturing plans.
With the contract, Motorola, the No. 2 mobile-phone maker, was hoping to secure the phone-making capacity it needed to handle what it expected to be a surge in demand for its products and compete better with No. 1 Nokia Oyj. Those expectations have been dashed this year as Schaumburg, Illinois-based Motorola's first-quarter sales dropped 11 percent to US$7.75 billion.
"The deal became much more difficult to fulfill from Motorola's side," said Lehman Brothers analyst Louis Miscioscia, who rates Flextronics a "strong buy" and doesn't cover Motorola.
The changing of the terms focused on the stock transaction, officials from both companies said.
Flextronics Chief Executive Michael Marks said in a statement that Motorola's stake in the company had "limited our progress with other suppliers."
Flextronics Senior Vice President Jim Sacherman said in an interview that some customers wanted a similar arrangement or complained that Motorola might be getting preferential treatment.
"We were getting many questions about the deal," said Sacherman, who denied any favored treatment for Motorola. "Even under that Motorola deal, we were winning every piece of business that we had to win."
In the stock purchase, Motorola actually bought a debenture that was convertible into 22 million Flextronics shares, based on meeting unspecified targets through the end of 2005, Flextronics's filing said.
"Without the US$30 billion, the equity does not have the same meaning to both parties," said Gray Benoist, corporate vice president of Motorola's mobile-phone and pager business.
Motorola was paying 82 percent below Flextronics' share price at the time the contract was announced, and it received the discount on the assumption that Flextronics would get US$30 billion of business over five years, Sacherman and Benoist said.
Motorola will remain one of Flextronics's five largest customers this year, Flextronics said.