Celestica Inc.

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Celestica Inc.

1150 Eglinton Avenue East
Toronto, Ontario M3C 1H7
Canada
Telephone: (416) 448-5800
Fax: (416) 448-4699
Web site: http://www.celestica.com

Public Company
Incorporated: 1994
Employees: 46,000
Sales: $8.5 billion (2005)
Stock Exchanges: Toronto New York
Ticker Symbol: CLS
NAIC: 334412 Printed Circuit Board Manufacturing

Based in Toronto, Ontario, Celestica Inc. is a former IBM unit that has emerged as one of the world's largest electronics manufacturing services (EMS) companies. Serving such major original equipment manufacturers (OEMs) as Cisco Systems, Dell, Hewlett-Packard, IBM, Lucent, Motorola, NEC Corporation, and Sun Microsystems, Celestica manufactures computer motherboards, communications and networking cards, and other complex printed circuit assemblies used in personal computers, servers, workstation, peripherals, and communications devices. In addition, the company offers design services as well as supply chain management, global distribution, and post-sales repair services. Although 80 percent owned by Canada's Onex Corporation, Celestica is a public company, listed on both the Toronto and New York stock exchanges.

ORIGINS: 1980–1990

The man most responsible for the founding and rise to prominence of Celestica was its long-time Chief Executive Officer Eugene Polistuk. An engineering graduate of the University of Toronto in 1969, he went to work for IBM Canada. "For several years, Polistuk had every reason to be happy with his choice of employed," wrote Barbara Hawkins in a 1994 Canadian Business profile. "During the 1970s and much of the 1980s, IBM dominated the computer world like some heavy-footed colossus. Its stock-in-trade was leasing big mainframe computers to large corporate customers." While IBM reigned supreme, Polistuk moved up through the ranks of senior management, holding posts in both Canada and the United States. In 1986 he became the head of IBM Canada's Toronto manufacturing unit, which mostly made boxes to contain IBM components. "It was there," according to Hawkins, "that he caught his first whiff of the troubles that would bedevil IBM in the future. The computer giant was under pressure from smaller, nimbler competitors, which were churning out low-priced microcomputers that in many cases could do exactly the same jobs as massive mainframes." With the tide turning against it, IBM began to reorganize, resulting in a widespread downsizing of the corporation. In both 1986 and 1988, Polistuk was forced to trim his headcount.

In order for his unit to survive, Polistuk believed it had to produce items more critical than a metal case. According to Hawkins, "The Toronto operation turned to building circuit boards, memory products and power supplies—products that could be used in a wide range of IBM computers. It invested almost $300 million over seven years in state-of-the-art machinery." Every IBM division was turning to the unit for components by 1993. Although regarded as one of the few bright spots at IBM, the unit was not spared as the corporate giant continued to struggle to regain its footing. More layoffs and other cost-cutting measures ensued, and IBM Canada's very future became uncertain when the parent company began making the transition from low-margin equipment maker to software and services provider. A spin-off of the operation was an obvious choice, but IBM's track record for such attempts in the past was poor. Hawkins reported, "Polistuk was convinced that his division was a different case entirely. He thought it lean and efficient enough to take on anyone. Indeed, he saw a silver lining in renaming the unit and freeing it from IBM. Such a move would allow it to start marketing its products to IBM's rivals, which were reluctant to deal with Big Blue directly but might be enticed to deal with a supplier who was at arm's length from the company."

CELESTICA FORMED: 1994

IBM was won over by Polistuk's arguments in talks that he initiated in 1992, and so in January 1994 Celestica Inc. was incorporated. Although the long-term vision was to set the company free, it was initially a wholly-owned IBM Canada subsidiary. "But it would have its own marketing staff and control its own finances," wrote Hawkins. "Polistuk would be given a free hand to cut costs, encourage innovation and discover new ways to motivate his 1,600 employees—most of them longtime veterans of IBM's bureaucratic mindset." Part of his strategy to stimulate motivation was to cut wages by 5 percent while instituting a profit-sharing program that amounted to 30 percent of an employee's base pay. Hence, the performers were better recompensed and the dead wood penalized. Moreover, he delegated greater authority to his top managers, who were essentially given a free hand as long as they met performance goals.

Celestica's timing was fortunate because OEMs were increasingly turning to contract manufacturers to furnish components and assemble them under their own labels. Within the first year Celestica lined up some 40 OEMs as customers. A year earlier the IBM unit generated less than 10 percent of its sales from non-IBM clients, but in its first year Celestica increased that contribution to 30 percent. In order to grow non-IBM sales and realize its full potential, however, Celestica needed to further separate itself from IBM in order to attract companies that were still reluctant to do business with an IBM subsidiary.

It did not take long for Celestica to find a suitor, Onex Corporation, a diversified holding company, eager to buy it away from IBM. Onex was founded by noted Canadian dealmaker Gerry Schwartz and had its hand in a wide range of businesses, including movie production, airline food, parking lots, and auto parts. Onex Vice President Anthony Melman was the point person on the Celestica deal. He began the courtship with Polistuk in a private dining room in a Canadian bank in May 2004. Over the next two years they would have more informal talks and Melman began urging IBM to cut loose Celestica, which was becoming ever more frustrated by its corporate parent's reluctance to let it go. Celestica's success, however, was the prime reason IBM held on to it for so long. Nevertheless, it was obvious that eventually the two had to part ways, and finally in 1996 IBM Canada agreed to sell the business. It hired Nebitt Burns Inc. to conduct a search of potential buyers. There was no shortage of interested parties, which were pared down to about a dozen. After another weeding out step, five remained, including an Onex-led group of investors. The finalists were allowed to review Celestica's financial data. In the end Onex won the prize in October 1996, paying $750 million. For Celestica it was a good fit, since Onex was known to take a hands-off approach and encourage a company's management team to take an entrepreneurial approach to growing their business.

COMPANY PERSPECTIVES

At Celestica, we are proud of our history of success in the technology industry At the same time, we know that the success of our company relies equally on the way we work with our customers and the way we work with ourselves.

Finally on its own, Celestica quickly moved to expand it contract manufacturing capabilities and add new OEMs through acquisitions. In January 1997 it bought Design to Distribution, a United Kingdom-based company that was one of the largest European contract manufacturers. Other acquisitions would follow in 1997, including Hewlett-Packard's Fort Collins, Colorado, printed-circuit board assembly plant; HP's New Hampshire system-assembly operation; and also its Chelmsford, Massachusetts' system-development business. Furthermore, in October 1997 Celestica acquired Ascent Power Technology, adding power-systems manufacturing operations in the United States, Canada, and the United Kingdom. As a result of this diversification, Celestica grew less dependent on its former corporate parent. In 1997 only 25 percent of its business came from IBM.

GOING PUBLIC IN 1998

To recoup some of its investment and provide Celestica with cash to fuel further expansion, Onex made plans to take Celestica public in 1998, inviting 11 top North American investment houses to bid for the business. They included the likes of Morgan Stanley Dean Witter and Merrill Lynch & Co. In the end Onex settled on co-lead underwriters: Morgan Stanley and Canada's RBC Dominion Securities Inc. The initial public offering of stock was completed in July 1998, raising $414 million, the largest IPO in EMS history. The rigors of taking the company public did not, however, prevent Celestica from completing eight acquisitions over the course of 1998, culminating in the purchase of International Manufacturing Services, the addition of which provided entry into Asia. The other acquisitions added operations in Northern California, Mexico, and Ireland, filling out Celestica's global footprint. The company grew in other ways as well in 1998, establishing Customer Gateway Centres, where customers could take advantage of Celestica's design prototyping capabilities and set the table for the launch of new products manufactured by Celestica. The initial Centers were located in Toronto, the United States, and Ireland, with others planned for Central Europe and Asia. When the first year of independence came to a close, Celestica reported revenues of $3.2 billion, a significant increase over the $2 billion generated in 1997 and a major step toward fulfilling a goal of $10 billion in sales by 2001.

Celestica returned to the public market, raising additional capital in 1999 to fund expansion. A March equity offering garnered $251 million, followed by another $225 million in May, and a secondary public offering of stock netted another $488 million in November. The money was used to buy five new facilities, most notably in the Czech Republic. In additional a pair of green field facilities were opened in Brazil and Malaysia. When the year came to a close, Celestica reported another strong performance, with sales increasing 63 percent to $5.3 billion. It was now the third largest EMS, but growing at a faster rate than the two market leaders: Solectron Corporation and SCI Systems Inc. The $10 billion mark appeared within reach and the $20 billion level appeared to be attainable in the not too distant future.

Expansion continued in 2000, when Celestica made further acquisitions in the United States, Brazil, and Italy, some of which were bought from IBM. In August 2000 Celestica completed its twentieth acquisition in just three years, buying Lowell, Massachusetts-based contract manufacturer Bull Electronics Inc. The company added capacity to its operations in the Czech Republic, Malaysia, and Mexico, and opened an office in Japan. It also signed a major supply agreement with Motorola, a three-year deal worth more than $1 billion in business. Revenues for 2000 totaled $9.8 billion, but just as the $10 billion target appeared in the company's sights, business conditions soured, creating what Polistuk would call the "perfect tech storm."

The telecommunications sector was hit especially hard and money from the capital market became scared and made it companies reluctant to invest in new equipment. Hence, OEMs were impacted, as were vendors like Celestica. The possibility of a tech correction had been foreseen by Polistuk and his team, and the company had already developed a plan to cut expenses, which was quickly implemented. For a time Celestica was actually able to take advantage of conditions. OEMs began outsourcing even more of their work in an effort to contain costs. As well, some firms were putting some of their manufacturing assets up for sale at attractive prices. Celestica bought a NEC plant in Europe and some Motorola facilities. Also in 2001, Celestica acquired Omni Industries Ltd., a Singapore-based contract manufacturer.

Celestica was fortunate to barely meet its $10 billion goal in 2001, but as poor business conditions persisted in 2002, the company did not fare much better than its customers, who were struggling across the board. Revenues dipped 17 percent to $8.3 billion. Especially hard hit were the company's European operations. Nevertheless, Celestica was able to retire some debt and repurchase shares, something its chief competitors could not accomplish.

KEY DATES

1986:: Eugene Polistuk takes over IBM Canada's manufacturing unit.
1994:: Manufacturing unit becomes subsidiary Celestica Inc.
1996:: Onex Corporation acquired company.
1998:: Celestica taken public.
2004:: Polistuk retires.

Sales continued to drop in 2003, declining 19 percent to $6.7 billion. In January 2004, before the yearend numbers were tallied, Polistuk retired, saying in a statement, "I feel it is time for me to pass the leadership of Celestica on to new and very capable hands so that I may refocus my priorities on family and personal interests." Succeeding him as chairman was Robert L. Crandall, who had been a director since 1998. Taking over as CEO was Stephen W. Delaney, president of the Americas division, who took over on an interim basis before becoming Polistuk's permanent replacement.

Business conditions remained quite challenging in 2004. After reporting a first quarter loss in 2004, Celestica cut its work force about 13 percent. Demand began to rebound in 2004 and as a result sales increased to $8.8 billion in 2004, but business had not yet returned to normal. Celestica continued to cut costs, launching a major restructuring effort in 2005 that included deep staff reductions and the closure or winding down of nine plants. For the year 2005 revenues fell slightly to $8.5 billion. Despite an extended period of challenging years, Celestica appeared to be well positioned, lean and efficient, to take advantage when business conditions ultimately improved.