Summit Interconnect is a leading provider of complex printed circuit boards (PCBs) focused on defense and high-performance commercial sectors in the North American market. Harris Williams recently advised Summit, a portfolio company of HCI Equity Partners, on its sale to affiliates of Lindsay Goldberg.
Here, professionals from the Harris Williams Aerospace, Defense & Government Services and Industrials Groups share insights on why the sector is attractive, what made Summit an excellent investment opportunity, and what buyers and investors interested in defense electronics businesses should consider.
What makes defense electronics, and the PCB space in particular, appealing to buyers and investors?
PCBs are the foundational building blocks to nearly all mission-critical defense systems. They are an essential component to powering the most advanced electronics systems in electronic warfare, radar, communications, avionics, and other critical systems. As such, there is not only a strong underlying demand for defense electronics but also for PCB components specifically.
Smith: There’s also been a massive push for a more secure supply chain to ensure all elements within a system are sourced from a trusted supplier. While this has always been important to the Department of Defense regarding defense electronics, this concept has trickled down the supply chain to include PCBs. PCBs are one of the few electronic components that are 100% custom-designed and are manufactured for specific applications, establishing bare PCB manufacturers as critical supply-chain partners to their OEM customers. When PCB prototyping is underway, there is a need for highly customized capabilities, quick turnaround, and IP protection.
Arendale: The dynamics in this fragmented sector favor scaled PCB platforms. OEMs need suppliers that can execute rapid and sophisticated prototyping and then scale to production. There are many small PCB businesses in the space that are capacity constrained. Technology requirements related to new applications are driving miniaturization as well as density and substrate innovation, and the capital investment required for such innovation can become burdensome to smaller businesses.
Rogers: Scaled players have a distinct advantage when it comes to navigating an increasingly stringent regulatory environment. They also require that defense microelectronics products meet trusted supply chain and operational security standards. Companies must go through a lengthy certification process, and only a limited number of PCB suppliers are certified as having the necessary qualifications. This creates a high barrier to entry for new manufacturers interested in the space. It also greatly limits the number of PCB companies competing for each major defense program.
What made Summit Interconnect particularly appealing to its investors?
Arendale: Summit can provide highly customized prototype PCBs at very fast turnaround times, with the ability to support full-rate production volumes once the prototype design is approved by the DOD contractor or OEM. This unique position within the supply chain positions Summit on nearly every major high-growth program in development. Its prototyping capabilities allow it to be involved at a very early stage in the development process, serving as a critical design partner to major defense primes. Getting involved early, and being viewed as a partner to its customers, is essentially Summit’s sales channel, and this can lead to positions on long-lived programs with significant production volumes. This combination of prototyping and production capabilities underpins Summit’s strong organic growth.
Rogers: Summit’s proven ability to identify, integrate, and invest in add-ons also sets it apart. It continues to execute a highly focused and disciplined M&A strategy and is seen as a consolidator of choice for small businesses in this fragmented market. The company has a great track record of identifying and acquiring the right companies to add necessary capacity or support specific programs, bringing them under the Summit umbrella and optimizing their performance as they are integrated into the broader Summit platform.
What advice do you have for prospective buyers interested in purchasing a defense electronics company?
Clark: For buyers interested in defense electronics, a vital consideration is how well aligned the company is with DOD funding priorities. It is essential for the company to be a supplier to all the key programs that are expected to benefit from long-term investment. The quality of the company’s customer relationships is also a critical component. Being a sole-source supplier on a specific program or application creates an inherent barrier to entry. Being one of only a few qualified suppliers of a specific product or technology allows for favorable pricing opportunities as well. Defense electronics are a crucial component and generally a relatively low cost to the overall platform. As such, customers are most focused on quality, performance, and turnaround time, where price is less of a concern if the parts continue to perform in these extreme environments.
Smith: Though the defense market has seen significant consolidation across the supply chain over the past several years, the defense electronics segment is still highly fragmented. There is a clear opportunity to further consolidate across multiple subsectors of the supply chain to build out a scaled platform in key technologies. A few areas where we see opportunities for consolidation include microelectronics, embedded computing, communications, and connectivity. There could be several ways to play this thesis, so the important thing is to have a strategy and clear vision for what you are building. That may consist of consolidating the supply chain within specific niche technology or building out a broader diversified defense electronics platform of scale that would be attractive to the next buyer. Defense electronics will be a great investment opportunity for the foreseeable future, and we expect to see a number of new platforms built in this space in the upcoming year.
For a deeper discussion, contact our senior professionals:
Chris Rogers | Managing Director, Aerospace, Defense & Government Services Group
John Arendale | Managing Director, Industrials Group
Christopher Smith | Director, Aerospace, Defense & Government Services Group
In addition to covering defense electronics and printed circuit boards, the Harris Williams Aerospace, Defense & Government Services and Industrials Groups have deep expertise in a wide range of subsectors. Learn more here:
Aerospace, Defense & Government Services
Industrials