beyondbrics

Will Taiwan’s component manufacturers suffer from supply-chain disruptions caused by Japan’s devastating earthquake, tsunami and nuclear disaster? No, say sell-side analysts: it’s a buying opportunity.

They would say that, perhaps. But private equity group KKR and Pierre Chen, founder and chairman of Yageo, a maker of chip resistors, weighed in behind that argument on Thursday as they launched a bid to take the company private.

The deal, which values Yageo at $1.6bn, would be Asia’s biggest private equity purchase to date.

Yet while the timing is certainly fortuitous – tech stocks, including Yageo’s (see chart), have come off a recent peak after the quake – in reality the deal illustrates not so much opportunistic buying as a textbook case for private equity investment.

Despite being the world’s biggest supplier of chip resistors by capacity, Yageo is a little known company. Many investment banks don’t even cover the stock and, unlike more prominent and bigger markets like chips or flat panels, few can claim to be experts in the passive components industry.

The deal did not come out of the blue. KKR has worked with Yageo since it bought the company’s convertible bond in 2007, since when Yageo has streamlined operations and moved manufacturing from Europe to China. One person close to the deal said the buyout was planned long before the Japan quake hit.

Nick Teo, head of Taiwan research at CLSA, an equity broker, said: “[There] has been a turnaround in the financials of the company that has not been reflected in its share price.”

Technologically, it is not difficult for companies to enter the passive components business, but doing so at low cost requires both scale and technical expertise, areas that KKR and Chen will now seek to improve on by making further investments in the company.

There are further long-term growth prospects for Yageo as more sophisticated consumer devices such as smartphones and tablets proliferate, using a greater numbers of components.

That is not to say the Japan earthquake will have no impact on the industry. There were fears of disruption at Murata, one of Yageo’s Japanese competitors, although it quickly resumed production after the quake. In the long term though, the industry is likely to see some re-organisation as manufacturers seek out multiple supply sources.

Yageo must hope it is well placed to take advantage.

Related reading:
Power cuts threaten technology supply chain, FT