Industry life-cycle theory tells us that there are some predictable stages an industry will go through from the time it's born until it's replaced by something better.
In the nascent stage, an industry is trying to build an alternative product, establish itself, and define the ranges of the industry. The growth stage follows when everyone goes hog-wild building capacity and growing, but by the time an industry reaches maturity, a shakeout is already starting to begin. Weaker competitors fall off and a large number of competitors are often combined to form industry powerhouses. Eventually a mature industry declines, but we'll focus on the earlier stages in this article.
The solar industry is no doubt in the shakeout phase somewhere between growth, maturity, and in my opinion, another growth cycle. We've seen companies fail this year, and I think it's time for the industry to begin consolidating. Here are a few deals that make sense.
First Solaris bought out
As I wrote earlier this week, I think First Solar (NAS: FSLR) is at a crossroads in its existence. The company's cost lead has been eroded, and its low-efficiency panels put it in a tough strategic position. What First Solar needs is a company with a big balance sheet, a powerful place in industry, and R&D knowhow to remain relevant. Two buyers make sense.
General Electric (NYS: GE) has already started building CdTe panels similar to First Solar, but I haven't seen evidence that the company is able to match First Solar's cost per watt, yet. If these two companies join forces, they could get their research and development labs together, take best practices from both, and emerge with even better products.
The one downside is that GE doesn't have the history of innovation that First Solar might need to survive, but there's a company that should be interested in First Solar that does.
3M (NYS: MMM) is known for innovation and has the R&D expertise to take First Solar to the next level. When 3M released its Ultra Barrier Solar Film a year ago, my hope was it would help flat-film solar manufacturers create a less expensive roll-to-roll process. So far that hasn't happened, but it's this kind of innovation that would make 3M and First Solar a great fit.
China buys China
It's unlikely that a company outside of China would be able to buy a Chinese manufacturer and keep the favorable short-term debt terms these firms have lived on, so I'm looking within China to buy Chinese manufacturers. As the most stable manufacturer, Trina Solar (NYS: TSL) has the capability to pull off a large acquisition. I think LDK Solar (NYS: LDK) makes a perfect fit for Trina.
As of the last quarter, Trina Solar had 1,900 MW of capacity to make cells and modules, but only 1,000 MW of capacity to make ingots and wafers. LDK is in the opposite boat with 3.7 GW of capacity to make ingots and wafers but only 1.3 GW of capacity to make cells. They would fit perfectly together.
With a market cap of just $433 million, Trina could easily buy the equity. LDK's massive debt load is another story, but I think Trina Solar could handle the debt with the benefits a deal would bring.
Other potential targets
JA Solar (NAS: JASO) and Hanwha SolarOne (NAS: HSOL) have market caps of just $301 million and $216 million, respectively, and would make good targets for a Chinese firm looking to add capacity.
Since most of the Chinese solar manufacturers are more or less the same company with similar equipment and similar cost structures, you could bolt almost any of them together to make an uber-manufacturer.
Something's gotta change
The way solar stocks are trading right now, the market is pricing in failure for almost all of these companies. To be sure some will fail, but there are opportunities for others to combine and make a more formidable solar manufacturer.
What two companies do you think would make a great combo? Leave your thoughts in our comments section and add these solar stocks to My Watchlist to keep up on all of the industry's actions.
Add Trina Solar to My Watchlist.
Add 3M to My Watchlist.
Add LDK Solar to My Watchlist.
Add JA Solar Holdings to My Watchlist.
Add Hanwha SolarOne to My Watchlist.
Add General Electric to My Watchlist.
Add First Solar to My Watchlist.
At the time thisarticle was published Fool contributor Travis Hoium owns a few shares of LDK Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar and 3M. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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