For about a year now I’ve been hearing about a new type of OEM divestiture – unloading legacy IP for products the OEM no longer wants to market. Most of what I know is hearsay, and I have not confirmed any of the specifics. But as the issue came up again this week, I thought I would put it out there. Please weigh in if you have any details to share.
A wild guess is that the IBM-Lenovo deal is serving as the model for these activities. Like IBM, most OEMs have legacy IP for products they no longer want to bother with, but instead of ending the product line they are trying to squeeze the last bit of money out of it. It is all too reminiscent of the way OEMs unloaded their old manufacturing plants during the divestiture boom of the 1990s. Instead of OEMs having to take write-offs, they sold these facilities (often at substantial premiums) to EMS companies who bought into promises of mountains of future business that never materialized and ended up writing off billions of dollars for underperforming assets.
It seems that contract manufacturers are the OEM’s dump of last resort. Whatever OEMs can’t get rid of in some other way, they dump on their contract manufacturers. There might be instances where it makes sense for an EMS to acquire the license to manufacture mature products. This may even fit the strategies of some larger EMS companies who are hankering to offer their own product lines as a way to supplement margins.
But EMS companies have manufacturing facilities, not sales and distribution channels. Even if there are potentially large markets in India or China for legacy IP-based products, the EMS provider still needs to find a way to market these products – which as any OEM will tell you is no easy task. Complicating the situation for the EMS is the likelihood that indigenous Chinese or Indian supply-sources may have already flooded their own markets with ultra low-cost knock-offs.
So on balance, this licensing of IP seems like another pig-in-a-poke. Has the EMS industry learned its lesson? I hope so for their sake.
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I agree Charlie. Donald Trump once said the heart of a good deal is when something is worth more to the buyer than the seller. If a company already has a cognizant marketing department (not an easy trick), established brand, and efficient distribution channels, why would “old” IP be worth more to someone who had to create these-especially an EMS company?
Of course, I never saw shareholder value in buying OEM’s mfg. facilities either, although a number of executives created some “scale” on their resumes.
Charlie – point well taken as it pertains to the OEM manufacturing facility dumping maneuver. However, the Lenovo strategy may be a win-win. I don’t have all of the facts but it looks like the brand is still doing well and even though it is IBM legacy product, should continue to do well in the growing emerging economies – not to mention that when I was recently comparing computers, Lenovo is in good standing with high quality and reasoable pricing.
Maybe a ‘proceed with caution’ on this one to be sure any legacy deals are win-wins for both seller and buyer would be good advice.