About a month ago, Flextronics announced the purchase of rival Solectron. Although the move comes not entirely as a surprise, the timing snuck up on more than a few of us. And it is a behemoth: Flextronics will pay some $3.6 billion, topping by more than $1.5 billion what it plunked down for its last major acquisition: the purchase of several Nortel manufacturing operations.

If the deal goes through (and in the fragmented world of contract manufacturing, there’s little reason to believe it won’t), it will narrow the gap at the top of the EMS leader board, where fast-growing Foxconn had opened a considerable lead. Still, the move comes with a host of questions, including whether this is the right buy at the right time, and whether this will touch off an acquisition spree that will envelope struggling competitors Celestica and Sanmina-SCI.

Both companies’ boards have signed off on the deal, which is scheduled to close by year-end. The combined company – Folectron? Sextronics? – will have about 200,000 employees and annual revenue of more than $30 billion (which is still some $9 billion behind Foxconn’s estimated 2006 sales).

Perhaps more than any of its competitors, Flex has shown it can absorb and integrate other companies with minimal operational – and financial – disruption. However, Solectron would be, in revenue terms, the largest deal Flex has done, and one of the most complicated. Reason: Solectron has had, at best, a spotty financial record, a confused product niche, and more than 50 manufacturing sites. Time was, the company was the star of the industry. But Winston Chen, the fabled former chairman of Solectron, who helped build not just the company but the industry by wowing Wall Street with fabulous growth, isn’t walking through the executive door again, and the latest CEO, Mike Cannon, jumped ship for Dell in February. Sales are off 25% from its high, and 10% since 2004, even while the EMS industry at large has returned double-digit growth. And the company’s stock has remained submerged – it hasn’t topped $4 in a year – despite the improving balance sheet.

In one sense, it’s a steal. The $3.6 billion purchase price means Flextronics is acquiring Solectron at roughly one-third its annual sales. And Solectron has $1.1 billion in cash, which will help buffer the inevitable capacity restructurings to come.

That said, besides creating a much larger entity, the benefits are, at first blush, harder to discern. Flextronics said the combined company could cut costs by up to $200 million, a rounding error given the girth of the merged entity. Moreover, that won’t be realized for up to two years, the duration Flextronics allowed that the integration could take.

And while Flextronics is generally considered by the industry to have outstanding financial instincts but just mid-range technology competency, Solectron has shown real technical ability at the high end, with its forté computing and networking. There’s little customer overlap between the two businesses at present (Ericsson and Nortel are believed to be the only two OEMs among each company’s top 10). I think that’s about to change, with Flextronics’ influence understandably winning out.

Analysts are mixed on the deal. Carter Shoop of Deutsche Bank Equity Research said, “Flextronics will likely find it difficult to retain small- and mid-size customers and cross-sell services,” adding, “The price tag appears rich.”  

iSuppli’s Adam Pick counters that Solectron’s progress – a 9% sales hike in 2006, $1.1 billion in cash – made it an attractive target. In a statement, he called potential capacity restructuring “a very opportunistic move for the merged company. … If [CEO Michael] McNamara and team can eliminate 5% of capacity, revenue-per-square-feet becomes attractive relative to the other North American-based EMS providers.”

Perhaps Flex was encouraged by Solectron’s improving profitability over the past two years. Or maybe it felt that its rival’s past two quarters, which put the company on a run rate of about $11.75 billion, are evidence Solectron has turned the corner.

I think we’re in for major cost-cutting, however, and that will reverberate throughout the industry. In terms of profitability, EMS is a notoriously difficult business. We’re the kings of the “one-time charge.” That’s one big reason CFOs like to point to EBITDA figures, not GAPP. In my book, however, that’s like engineers discounting certain field returns against their yield data.

I’m wary that this may be too much, too soon, even for Flex. Foxconn has been growing at 25% a year clip, and perhaps Flextronics felt a big move was in order to close the gap. This would just about do it. But biggest doesn’t always mean best. I think the real winners are going to be Plexus, Jabil, and perhaps, to a lesser extent, Benchmark – North American EMS firms that focus on higher-end technology. For them, Flextronics’ move will remove a technology rival with a large domestic footprint. That’s a nice Christmas gift, and it’s only July.