Buying a better tomorrow: Power industry vendors prove they're no strangers to timely partnering

Mergers and acquisitions are nothing new to the telecom business. In the last few years, the shockwaves of deregulation and new market opportunities have sent carriers scrambling for new soul mates. The urge to merge also has struck fiercely in the vendor arena, with infrastructure builders and equipment makers from all over the market, including Lucent Technologies, Cisco Systems and ADC Telecommunications, buying up their brethren for business and technology reasons.

It should come as little surprise then to find the same trend is permeating through the various levels of the power equipment industry. Several acquisition deals have swept through this segment of the industry within the last year. Some more recent ones include last December's merger of Computer Products and Zytec to form the newly named Artesyn, Todd Products' acquisition of Oryx Power Products, and Maxwell Technologies' purchase of Phoenix Power.

In another equity-related move, New York investment firm J.F. Lehman and Co. bought a controlling interest investment in Elgar Electronics.

A wide array of factors has driven such deals. In some cases, companies have been looking to fill product or market niches they previously had not served. For instance, before merging with Zytec, Computer Products also acquired other companies to help it address growing opportunities internationally and in the high-end power market.

These deals include the 1996 purchase of Jeta Power Systems and the 1997 acquisition of Elba, a German company.

Zytec also kept busy acquiring Austria-based vendor Schrack, a vendor based in Austria, in 1991.

In particular, the European-focused acquisitions have been important as overseas power markets have begun to grow. When Computer Products finally merged with Zytec late last year, the combined companies' European sales reached 27% of overall sales.

The deal with Zytec also brought in expertise in power for computing and networking devices, said Joe O'Donnell, co-chairman, president and CEO of Artesyn.

"Everyone is trying to do global business, and there are different needs internationally," added John Steel, Artesyn's vice president of marketing and new product development. "For instance, they need lower-wattage products in Asia."

Indeed, the spread of opportunities worldwide in the low-end and high-end segments of the power market are driving vendors to leverage their success in one market segment to attack another, said Steel.

Size seems to be another key factor in the recent mergers. Merged companies have more purchasing power that they can leverage to reduce the amount they need to spend with their own vendors, said O'Donnell.

In the J.F. Lehman/Elgar equity deal, the new investor will help Elgar fuel future acquisitions, according to Ken Kilpatrick, president of Elgar.

In addition, many of the principal network infrastructure vendors that have always maintained power equipment divisions as a necessary part of their turnkey approach to building carrier networks are now selling those divisions. Vendors have begun to recognize that outsourcing for power needs is cheaper than keeping an in-house power operation running.

"There is a definite trend toward outsourcing as a result of some of the big manufacturers selling some of their power businesses," O'Donnell said. One of the benefits of outsourcing is that a company with a core business of building switches does not have to funnel valuable funds into a power business just to maintain an edge in new product development.

Artesyn is taking that cue, and it now has 12 engineering facilities distributed among seven countries, allowing it to keep many balls in the air, in terms of development.

In the end, it is usually all these factors that are steering power equipment firms toward mergers and acquisitions.

"[The Oryx acquisition] broadens our product line, enhances its mix and provides additional resources for sales, engineering and manufacturing," said Kathy Todd, president and CEO of Todd Products.

Kenneth Potashner, chairman and CEO of Maxwell Technologies, called his company's acquisition of Phoenix Power strategic from several standpoints, including corporate synergies, technology skills and growth potential.

Corporate synergy also was a key in the other recent acquisitions. In addition to having other product holdings and strategies, Artesyn's forerunners-Computer Products and Zytec-reached sales of about $235 million in 1997.

Zytec had a compounded annual growth rate of 31%, while Computer Products was only slightly higher at a 33% growth rate. Zytec's strength in direct sales meshes well with Computer Products' history of using distribution channels.

Although these bottom-line issues generally support the viability of mergers, one other key industry connection helps dictate the wisdom of deal-making. The important deal-making factors are issues that somehow link back to the trends directly affecting these companies' ultimate end users-the carriers.

"There are some things that are changing the face of power in the network," said Marshall Miles, strategic marketing director at Artesyn. "More data equipment is being moved into central offices, but a lot more traditional equipment is being moved out of COs to other offices. Cell sites are moving from large huts to small cabinets. Internet service providers are trying to gain network robustness that they did not have before."

"Anything we do ultimately is driven by what's happening at the network operator level," said Artesyn's O'Donnell.

In any case, the deal-making likely will not stop anytime soon in the power equipment arena. Companies will continue to search for and evaluate market segments they do not participate in now.

Grabbing the tail of another vendor often may be the quickest route to take advantage of such new opportunities.

In this regard, the continued growth of the wireless industry, with constantly expanding networks and the entrance of many new carriers, is giving power equipment vendors much to think about. Vendors that already have a strong foothold in wireless likely will become targets of many partnership proposals.

The same will be true in the Internet services industry. Carrier-level consolidation already has been happening in the arena, and networks are being built out at a rapid pace. Vendors with experience in power supplies for computing equipment and Web and data servers will be the hot targets.

Elsewhere, as outsourcing continues and infrastructure vendors put their own power divisions on the auction block, a whole strata of other power equipment vendors likely will scramble for the chance to become bigger and better.

Williams Communications Solutions, which has begun to focus on business communications equipment and multimedia integration since selling its WilTel long-distance unit, recently tapped ONEAC Corp. for enterprise network power protection solutions.

Williams will deploy ONEAC's ON-Series uninterruptible power supply products for reliability improvement and battery backup. Williams is seeking to enhance many older PBX systems for more than 122,000 customers with advanced multimedia capabilities, according to Dave Schopeck, Williams' product manager.

In other contract news, the Cactus Integration Group selected CORD Communications as its primary provider of technical and construction services for power and transmission infrastructure deployments throughout several large West Coast markets.

The Cactus deal will be worth more than $10 million to CORD Communications over the next 12 to 15 months, according to Cactus officials.

"The Cactus team has put together an innovative approach to solving the critical deployment problems of major telecom carriers," said Mark Reed, president and CEO of CORD. "The synergy that exists with this partnering agreement has the opportunity to redefine the way people plan and implement multiple network technologies."

The Denver-based Cactus Integration Group coordinates a national alliance of engineering, installation, construction management and equipment reseller companies within the telecom industry.

Elsewhere, Cabletron Systems contracted with Lucent Technologies for broadband power modules to be used in Cabletron's SmartSwitch family of products. The modules will be used for circuit board power to improve reliability. Cabletron will use Lucent's JW, FW and NH Series of BMP DC-to-DC converter modules.