Private Equity and Offshoring

Buried on page 22 of the Financial Times today is a brief news item announcing that Michael Marks, the outgoing CEO of Flextronics, is joining Kohlberg, Kravis and Roberts.  Marks was a key architect of the aggressive move by Flextronics, one of the world’s leading contract manufacturers for the high tech industry, into China and India.

This is a significant signal regarding the growing interest of private equity firms in the offshoring market.  Private equity firms look for situations where companies are slow to restructure their operations in response to intensifying competitive pressure.  Many Western companies have been slow to exploit the potential created by offshoring, both to reduce cost and, more importantly, to participate in skill-building arbitrage.

Private equity firms see a substantial opportunity to accelerate this process. They can take companies private that are under-performing, re-structure them by stripping out operations that can be better performed offshore and then take the company public at a much higher valuation. There is a key message to senior executives – if you don’t move aggressively to take advantage of offshoring opportunities, private equity firms may step in to do it for you.