Ducommun Inc.--the oldest continuously operating company in California--said Monday it has agreed to divest three financially struggling electronics divisions that accounted for 85% of last year's sales in a deal valued at $130 million.
Included among the divisions to be sold to Arrow Electronics Inc. of Melville, N.Y., is Ducommun's Kierulff Electronics unit, the fourth-largest electronics distribution company in the country. Both Ducommun and Kierulff are based in Cypress.
Arrow, the nation's second-largest electronics parts distributor, has agreed to acquire Ducommun's three electronics businesses: Kierulff, Ducommun Data Systems and MTI Systems Corp., by issuing stock valued at about $40 million to Ducommun shareholders and to assume about $90 million in Ducommun debt.
Ducommun, founded in 1849, moved its corporate headquarters to Orange County from Los Angeles in 1986. It has been beset by nagging financial problems and chronic management turnover in recent years. The company lost a combined total of nearly $39 million in 1985 and 1986 and has fired two presidents in two years.
FOR THE RECORD
Los Angeles Times Wednesday September 23, 1987 Home Edition Business Part 4 Page 2 Column 6 Financial Desk 2 inches; 41 words Type of Material: Correction
MTI Systems, one of three businesses to be sold by Ducommun of Cypress to Arrow Electronics of Melville, N.Y., has generated consistent profits and experienced significant growth in recent years. An article in Tuesday's Times incorrectly characterized MTI as a "struggling" operation.
Ducommun "views this consolidation as the most effective way of enhancing shareholder values for the distribution segment of our operation," Wallace Booth, Ducommun's chairman, president and chief executive, said in a prepared statement.
Ducommun Stock Closes at $18
Wall Street reacted enthusiastically to the announcement. Ducommun stock closed Monday at $18, up $1.625 in trading on the American Stock Exchange. Arrow stock closed unchanged at $9.75 on the New York Stock Exchange.
The sale will result in a much smaller and very different Ducommun. The company's electronics businesses accounted for 85%--or $386.6 million--of Ducommun's 1986 revenues of $455.2 million. Those businesses also employ about half the company's 2,500 workers, company officials said.
Ducommun is retaining three aerospace services units--AHF-Ducommun, Aerochem and Jay-El Products--and a cable manufacturing division, Tri-Tec Engineering. The four operations generated 1986 sales of $68.5 million.
In 1986, Ducommun management embarked on a restructuring program designed to return the company to profitability. The company reported earnings of $785,000 for the second quarter of 1987.
Financial analysts--several of whom said the sale of Ducommun's core businesses was unexpected--predicted that the pairing would be of benefit to both companies.
"It makes a great deal of sense," said Clarke Walser, an analyst with the Chicago Corp. "It's one of those deals that everyone wins on."
Although the electronics business composed the bulk of Ducommun's sales, Walser said, its aerospace businesses are solidly in the black. "Ducommun has eliminated a persistent problem in its corporate affairs and, at the same time, turned itself into substantially a pure play in the specialty aerospace business with some good potential in the coming years."
Analysts said that Ducommun's chronic problems, which were compounded by a difficult industry operating environment, forced the company to take drastic steps to improve its profits.
Besides its losses and management disruption, Ducommun lost two key distribution franchises, Motorola and Advanced Micro, and took an $11 million inventory write-down in late 1986.
"For Ducommun, it's a graceful way out of the electronics distribution business," said Richard Rieger, an analyst with Ladenburg, Thalman & Co., a New York investment firm. "They've been unable to get their hands around that business to get the best benefit for their shareholders. The harder they tried, the harder it got."
In an interview, Stephen Kaufman, Arrow's president and chief executive, called the merger a "very close fit" that would combine the strengths of both companies. He said Arrow's electronics distribution business is stronger in the East and Midwest, while Ducommun is more dominant in the West.
"The industry, in our judgment, is going through a restructuring," Kaufman said. "One of the natural outcomes of that will be a consolidation phase similar to what happened in the semiconductor industry."
He said Arrow expects to gain "some fairly attractive profit improvements" by consolidating duplicate operations of the two companies, such as computer systems and sales offices.
Arrow said Ducommun Chairman Booth will join its board after the sale is completed. Booth was reported to be out of town Monday afternoon and unavailable for comment, a company spokeswoman said.
The acquisition is subject to approval of both companies' shareholders and the successful refinancing by Arrow of nearly $90 million of Ducommun's bank debt.
Under the agreement, Arrow will issue 4.1 million shares of common stock to Ducommun, all or most of which will be distributed to Ducommun shareholders after the deal is completed.