RTC Group, Inc.

Consolidation Going Smaller

By: Warren Andrews - Associate Publisher

Over the past decade, the embedded computer industry has seen unprecedented consolidation. At last count, there were well over 40 acquisitions—many of which were nested. GE Embedded Systems alone accounted for well over a dozen when one considers that SBS—which was acquired by GE in 2006—accounted for about ten, and Radstone—which GE acquired in 2007—had acquired at least three companies before being taken over by GE. The bottom line is that it is now estimated that 35% of the embedded computer business is controlled by three companies.

Throughout the past year or so, the rate of acquisition appears to have slowed—either there are not enough targets, or major acquirers are taking longer to digest their prey than at first expected. However, even during the most active period, small form factor companies seem to have been skipped over—with the possible exception of Kontron, which acquired Teknor, PEP Modular, Taiwan Mycomp, ICS Advent and Jumptech. While it has been reported that there was interest both on the acquiring side as well as companies offering themselves for sale, there were very few transactions. There are currently well over 100 different small form factor companies.

Of course, until recently, the small form factor industry was comprised of very small companies that just recently enjoyed a big growth spurt. While that turned these companies into larger, profitable entities, and more desirable acquisition candidates, the inflated valuations that had been around in the late ’90s—companies selling for large multiples of sales—were gone, and prices returned to some sense of realism. The pricing issue must have had some impact on the slowing rate of acquisitions.

Now, however, it seems that acquisitions are again very much in the news. Kontron recently acquired the board level group at Thales, which in turn was the remnant of the earlier acquisitions of CETIA and Matrix Computers. Applied Data Systems was taken over by Eurotech early this year, which had also acquired Parvus last year.

Now, the latest takeover has Adlink acquiring 100% of privately held Ampro Computers—the developer and early leader in the PC/104 business. And it was not too long ago that Adlink was considered a possible takeover or merger candidate by another company. Now there are at least hints of two more possible mergers in the works. Who’s next?

Good News, Bad News

Many of these mergers in the embedded computer industry took place long enough ago to start evaluating whether or not they have benefited the companies or the customers. With some of the acquirers such as Curtiss-Wright and GE, there is no way to measure the economic effect since these companies do not release granulated details of each of their divisions.

However, in the case of Kontron, one of the larger acquirers over the past several years, its business appears to be doing well—if the stock price and annual report are any indication. Annual sales for fiscal year 2007 were estimated at € 440 million (~$682 million) with a market cap of better than € 800 million, which probably makes it the largest embedded computer company in the industry. There is no way of comparing it with, say, GE or Curtiss-Wright.

But while companies such as Kontron and Eurotech appear to be prospering, what’s happening to their customers? At the bottom line, the customers are getting the worst end of the deal. One prominent executive of a large acquiring company says, “The biggest effect [of consolidation] on the market and industry has been the lack of continuous innovation. All the small entities have been consolidated into larger organizations and are managed by the bottom line. The innovative spirit has been lost. I believe that in the big scheme it has hurt our customers as well because the larger consolidations are being viewed as competitors by our customers.”

And the problem may well go even deeper. Many companies have acquired competitors making the same or similar products. Part of the advantage of consolidation is that they can take advantage of many “synergies.” Unfortunately, that often translates into saving not only on infrastructure, but in consolidating similar products resulting in a reduction in the number and variety of products available to customers.

In announcing its ESOP (Employee Stock Ownership Program) late last year, WinSystems CEO Jerry Winfield says, “Too often we see that when a company is acquired by another firm, within a year their products disappear as they are integrated together with other product lines (see News, Views & Comment, RTC, November 2007). And that, perhaps, is the biggest tragedy of the rash of consolidation we’ve seen.”

Smaller Is Still Better

Over the past year we’ve seen a dramatic growth in small form factor embedded computer bricks, boards and modules. From the very small through many of the mid-sized small form factor products such as EPIC, we’ve seen dramatic growth. And this year, expect to see even more of the same as Intel, Via and others jump on the very-low-power processor bandwagon and these processors find their way onto embedded computer products.

We’ve been so impressed by this growth that we’ve asked Paul Rosenfeld and Colin McCracken to help you, our readers, sort through the jungle of small form factor products, from microcontroller boards to superpower small platforms. Their contribution begins this issue and we welcome their wisdom and insight. More on new generations of low-power boards and the applications they serve next issue.

Ups and Downs

Motorola will split its mobile unit from its broadband and mobility-solutions businesses.

Stock market plague: Stocks are, as of this writing, trading right where they were nine years ago. So much for long-term investment.

Lockheed Martin F-35, Joint Strike Fighter is in the news again as Pentagon officials begin a review of whether to proceed with the plane that could cost as much as $1 trillion over the next few decades.

Analyst firm, Gartner, cut its forecast for personal computers to 10.9% growth from its December estimate of 11.6%.

Nvidia graphics processor takes on supercomputer duties in number-crunching applications. One of the first chores for the lightening-speed math processor is evaluating subprime loans to see which might be worth buying on the cheap from distressed banks. Look for similar techniques on computationally intensive embedded platforms.

GPS chip maker SiRF cuts staff 7% after seeing demand from some customers dropping as much as 50%.

Intel ups the multicore ante with a six-processor chip codenamed Dunnington due sometime in the second half of the year.

The European Union selected the DVB-H (Digital Video Broadcasting for Handhelds) mobile-TV standard over other choices. The EU cites research that predicts a worldwide increase in demand to $31.34 billion in sales by 2015.

© 2009 RTC Group, Inc., 905 Calle Amanecer, Suite 250, San Clemente, CA 92673