A Mindful Frenzy

Linnea Brush
Senior Research Analyst

February 6, 2006

Over eight years ago, I wrote a PowerLines column about the “mindless frenzy” of mergers taking place in the power supply world. Computer Products had just agreed to acquire their rival, Zytec Corp., and Celestica had acquired Ascent Power Technology. These “smaller” communications power supply manufacturers were buying up even smaller companies as a way of competing with the larger communications power supply makers. Would these newly merged companies now have the economies of scale to pose a serious threat to the larger, more established communications power supply manufacturers?

 

What is interesting about this competitive landscape are the large players that the smaller companies were competing with: Lucent Power Systems, Lambda, Reltec and Nortel Advanced Power Systems. None of these companies exist in these forms today; they all succumbed to divestitures or mergers.

 

So, does the recent acquisition of Artesyn (the product of the Computer Products/Zytec merger) by Emerson really mean anything in the long run? That is probably an unfair question in the current era of short-term profitability. Artesyn did well for itself in its brief, eight-year run. One could argue that the current crop of mergers and acquisitions are the same companies simply rearranging themselves yet again.

 

There are differences between now and then that could make this current cycle more of a “mindful frenzy” than a “mindless” one, however. When a large, diversified companies divest their power supply divisions, you often get a lot of start-ups in their wake. Previously, many of these companies were power supply companies, like di/dt and Synqor. Now, they are semiconductor companies like iWatt and Primarion, many of whom are starting to acquire companies of their own.

 

I believe the reason for this is the same reason that the dedicated power supply companies are getting bought in the first place: Power supplies have increasingly become a commodity, and Asian companies like Delta have a very strong cost advantage when it comes to commodity products. The only way to make money on power supplies is to compete at the Delta level, or find the more cutting edges of power. That is now squarely in the semiconductor camp, even though new developments continue to take place in power supply design.

 
One of the ways companies have dealt with this brave new world of power supplies is to form alliances to promote various technologies or form factors, like POLA and the PMBus. When mergers take place, members of these alliances often get merged, as well, such as Astec and Artesyn. Astec has managed to somewhat keep its original identity, although Emerson doesn’t always like this. I have no idea how they’ll treat Artesyn, who also has a strong branding.

I did make a statement in my 1997 column that did not take into account one of the serious threats that later emerged. I said that, “North America is fast becoming home to some formidable companies in the largest power supply segment in the world.” The telecom portion of the communications market crashed, and the computer portion was a victim of price pressures from commodity systems and cheaper manufacturing in Asia. North America and Europe still have some formidable companies, but the power supply business model has changed considerably.

Sometimes mergers and acquisitions take place because of expanding opportunities, particularly when markets are opening up, like communications did in the late 1990s. Now, they are occurring because markets are closing down, and companies need to consolidate to remain competitive.

So, have things really changed? Mergers and acquisitions are still with us and probably always will be. But the reasons underlying mergers are more telling than mergers taking place at all. In another eight years, what decisions will drive the power supply business?

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