Firstronic and Lacroix took a long-term approach to joining forces, eliminating the usual learning curve.
As a 40-year veteran of the electronics manufacturing services industry, I’ve seen my share of EMS mergers and acquisitions from both sides of the equation. The basic EMS industry business model adds complexity to that equation not found in most industries because EMS companies are an extension of their customers’ manufacturing operations or, in some cases, their entire manufacturing operation. If a larger conglomerate acquires the company that manufactures your dish soap, you won’t notice unless the product’s effectiveness or branding changes dramatically. If your EMS provider is acquired, it’s obvious on day one.
In many transactions, the only consideration of impact to an EMS company’s customer base is visits to key customers during the due diligence phase to enable the acquiring entity to assess whether the business levels they anticipate are likely to continue in the new entity. The alignment of EMS brand/differentiating processes and facility redundancy are often minor considerations.
Choices to sell typically fall into one of six categories: aging or death of key ownership, desire of a primary investment partner to exit, seller’s perception of economic trends in its markets, financial distress, desire to divest a subsidiary nonaligned with parent company financial performance goals, or an incredibly good offer.
Reasons for buying also typically fall into six categories: expansion into new geographic or industry markets, growing market share, acquisition of specific customers, pressure from a dominant existing customer to add capabilities or geographic reach, investment partner pump-and-dump rollup strategies, or the ability to acquire an operation at fire sale prices.
The rationale behind selling and acquiring EMS companies isn’t necessarily bad. While the ones with the weakest business reasons or greatest operational redundancy often have steep learning curves or take longer than anticipated to become accretive, most acquisitions succeed. The new entity integrates, and customers that fit the model stay. However, the nature of M&A transaction motivation drives a short timeline that may not prioritize maintaining an unchanged customer experience business model.
Recently, I watched Firstronic go through this process. Since John Sammut and his team joined the company in 2011, Firstronic has had a tradition of breaking industry paradigms, so it is no surprise their approach in this area was also innovative. It is one of the more unusual – and customer-beneficial – transactions I’ve seen over the last 40 years.
When Sammut’s team started at Firstronic, they had limited capital for expansion and were targeting a customer base that wanted a global network of facilities. To address that, they focused on building a North American footprint with factories in Michigan and Mexico and set up a joint venture in China and strategic alliances in Eastern Europe and India. As their business evolved, they decided to use this model to align with a partner capable of acquiring the business longer term, essentially setting up a business succession strategy.
In 2017, Lacroix, an EMS provider headquartered in France, purchased a minority stake in Firstronic, then acquired majority control of the company in 2021, when Firstronic’s primary investment firm chose to exit the business. That exit strategy included soliciting and entertaining other offers, so there was no valuation downside to this longer-term approach to exit-strategy planning.
From an organizational and customer perspective, this approach was extremely beneficial. The original relationship was based on mutual need. Firstronic needed a strong EU footprint to reassure customers desiring the flexibility to implement a regionalized manufacturing strategy that it could accommodate them across all regions. Lacroix needed a strong North American and China footprint for the same reasons. Firstronic had the North American footprint, and its joint venture partner Maxway provided the China footprint. In short, there were no redundant facilities, and the combined facility locations aligned with customer support preferences. (Maxway remains a shareholder and a valued partner in the combined entity.)
There was also alignment in industry focus. Firs-tronic’s focus has been automotive, industrial and medical. Lacroix targets industrial automation, home and building automation, civil avionics and defense, and healthcare. From a capabilities perspective, Firs-tronic’s approach to Lean manufacturing and operational metrics was attractive to Lacroix. Lacroix’s larger size and associated economies of scale were attractive to Firstronic. Lacroix also added design engineering capabilities to the mix.
However, the largest benefit has been the time the teams have had to develop processes to work together. When an M&A transaction happens on a short timeline, integration has a learning curve that customers often see played out in service anomalies. Comparatively, the teams have been working together for more than four years. There have been joint NPI efforts for customers using multiple facilities, so that process is already well understood. When Firstronic added equipment during that timeframe, they considered Lacroix’s focus on Industry 4.0 automation strategy, in addition to customer requirements. At a systems level, there is enough compatibility to take a measured approach to any change. While Firstronic’s ERP system will likely change to Lacroix’s platform, at least for financial reporting purposes, Lacroix is evaluating Firstronic’s MES as a potential company-wide standard. In short, the integration process is likely to enhance the customer experience in terms of service delivery, since post-transaction Firstronic’s customers have greater access to design engineering resources and the support capabilities found in a much larger entity.
From an economies of scale perspective, the combined entity has climbed to number 43 on Manufacturing Market Insider’s Top 50 EMS list, and Lacroix has achieved its goal of becoming the largest French EMS provider. Firstronic’s long-term approach to laying the groundwork for its lead investor’s eventual exit has achieved all the objectives of a traditional M&A transaction, with none of the learning curve issues of a fast transaction. Customers are seeing expanded capabilities and the economies of scale that come with a Tier 2 EMS company, without the growing pains that growth would bring if it happened organically. Financially, the acquisition has been immediately accretive to Lacroix. It is a win-win for all parties.
The concept of succession planning within management teams is well established to ensure continuity within an organizational hierarchy. The concept of succession planning in terms of this type of organizational evolution is not well developed in the EMS industry. The Firstronic-Lacroix transaction demonstrates the organizational and customer benefits that can occur with a longer-term approach to exit strategy planning.