What Led Nypro To Sell To Jabil?

President and CEO Ted Lapres said Nypro's recent challenges had more to do with market changes than capabilities.

Executives of Jabil Circuit, which is buying Nypro Inc., of Clinton, said the Nypro name and brand will continue to be prominent.

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You'd be hard pressed to hear a more reassuring message stemming from a corporate acquisition than the tone struck this month by Jabil Circuit, the Florida-based company that has agreed to buy Nypro Inc. of Clinton for $665 million.

Jabil's outgoing CEO, Timothy L. Main, told stock analysts and media following the announcement that Jabil doesn't do many acquisitions. Yet when it does, he said, it tends to keep most of the acquired firm's employees.

“We're acquiring Nypro, merging with Nypro, combining with Nypro because we love their business,” Main said. “The value of the business is in its people and their know-how.”

But that doesn't mean there won't be cuts.

Main said his team will work out consolidation plans over the next few months while the deal goes through the approvals process.

“But I certainly wouldn't expect significant disruptions,” he said.

That message fell upon relieved ears among Nypro's 850 employees in Clinton (the company employs 12,000 globally), and could be important as a ratification vote looms among Nypro employees who own portions of the company under its employee stock ownership plan (ESOP).

Mutual Interests

Nypro, founded in 1955, is a $1.2-billion company that has long-standing relationships with big customers and a global presence. So why would it want to be acquired?

Simply put, Nypro needs both an infusion of capital that's been hard to get under an ESOP structure, and new capabilities that it doesn't have but that customers want.

Ted Lapres, president and CEO, said in a telephone interview that Jabil is an “excellent, strategic fit.”

“I think Jabil is one of the best-run companies in this space,” he said. “And I know them all.”

Lapres said recent challenges Nypro has faced are not so much about its precision plastics capabilities as they are about recent consolidation among competitors in the consumer electronics, health care devices and disposables spaces. He added that customers have started to demand more vertically integrated contractors, vendors that have capabilities to provide multiple production processes during various stages in the making of a particular product.

“It became very clear over the past couple of years the competitive landscape was changing and that size mattered in this industry,” he said.

Nypro began noticing a shift in the consumer electronics market in China several years ago, specifically among cell phone makers. Integrated players were scooping up manufacturing contracts at low prices.

“What had been a more fragmented space is consolidating,” he said.

Changes In Target Markets

If the merger takes effect, Nypro and Jabil will have some synergy in the cell phone space. Jabil increased its presence in that market through its 2007 acquisition of Green Point, a Taiwan-based manufacturer of handset cases.

The bigger-is-better trend has also started to occur in Nypro's largest market — health care.

“Our view is that the health care space is moving in that direction ... and that our customers are demanding more size, more capabilities, and integration with electronics and medical devices,” Lapres said.

Becoming a division of Jabil (pronounced JAY-bill) would provide a combination of capabilities in both plastics packaging and parts as well as electronics design, he said.

David McKeehan, president of the North Central Massachusetts Chamber of Commerce, of which Nypro is a member, said he's happy Nypro will remain a key member of North Central Massachusetts' plastics cluster, which has shrunk over the years but still remains the largest in the Northeast. The cluster employed around 5,000 people in 2005, according to a chamber analysis.

“A deal like this certainly makes some sense, and hopefully it will mean the continued growth of Nypro,” McKeehan said.

As for Jabil's entry into the plastics market just five years ago, McKeehan called the acquisition of Nypro “a hell of a way to ramp up.”

Though there is common ground between Jabil and Nypro — such as the cell phone market — Jabil said it's most interested in growing its health care and packaging divisions, both key Nypro markets.

The acquisition would make Jabil a major player in the health care and packaging markets, adding hundreds of millions of dollars in revenue to its health care and instrumentation business division, which accounted for just 8 percent of its sales in fiscal 2012.

Of Nypro's $1.2 billion in annual revenue, approximately 68 percent comes from health care and packaging. Jabil , meanwhile, earned $394.7 million on $17.2 billion in revenue in its most recent fiscal year.

Nypro also adds $205 billion to Jabil's addressable market and accelerates by several years its plan to move into the health care space.

In addition, Nypro brings generally longer product cycles compared to Jabil's other business lines, which could help even out earnings volatility for the publicly-traded firm.

Jabil also likes Nypro's reputation in the industry. The Clinton manufacturer has had decades-long relationships with some of the biggest companies in food and beverage, household and consumer care.

To leverage that reputation, Jabil executives said the Nypro name and brand would be prominent.

Victim Of Its Success?

Gordon Lankton, Nypro's chairman, sold virtually all his stock in the company 15 years ago to the ESOP, making Nypro one of the largest employee-owned firms in the country.

Employees receive shares each year based on individual performance, years of service and other factors. The shares' value is periodically assessed, and employees can cash out when they leave or retire.

The plan has made millionaires of a number of Nypro retirees, Lapres said, but it has restricted how Nypro has been able to raise capital for growth. For example, the company has to keep enough money to pay out departing employees. Also, it can't sell much stock to outside investors, because its ESOP restricts outside ownership to less than 10 percent. (Lapres would not reveal the current value of the shares.)

“You have to devote more of your free cash to your redemptions versus investment to grow the business,” he said. “A successful ESOP begins to eat itself almost.”

So Nypro's options for keeping up with trends in its core markets were limited. Private equity was one possible route, but that wouldn't have brought additional capabilities that the Jabil merger will, Lapres said.

Though Nypro has offered stock to employees around the globe, only its domestic employees are legal members of the ESOP. So that means only U.S.-based employees will vote on the merger. Nypro has locations in Iowa, North Carolina, Illinois, Georgia, California and Puerto Rico.

The vote, which is expected to take place in March, will require more than two-thirds of shareholders to approve the deal, Lapres said. The company has hired an independent advisor to represent employees in the discussions, it said.

Lapres said management has been meeting with employees since early February about the acquisition.

“I think there's been a fair degree of excitement about the potential this could bring,” he said.

For some of those employees, the acquisition could mean the end of their jobs, though Jabil has not revealed specific consolidation plans.

Jabil has also not revealed its management plan for the pending acquisition, but Lapres said he has been asked to stay in his role in Clinton, where he will work alongside Jabil's Courtney Ryan, senior vice president for global business units.

Lapres said both Nypro's health care and packaging business, as well as Jabil's existing health care business, would be run out of the Clinton headquarters.

“I think it's a strong statement they have a key executive moving to Clinton,” Lapres said. “It's always been critical to Nypro as our corporate headquarters, but it's going to be an important center for running this combined health care (and) packaging division.”

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