In a move designed to give the wireline equipment leader a boost in its wireless sales, ADC Telecommunications Inc. said it would pay $2 billion in stock to acquire Andrew Corp.
Indeed, a combined Andrew and ADC would reap almost half of its revenues from sales of wireless equipment. The companies said their combined customer base breaks out into 44 percent wireless, 24 percent original equipment manufacturers, 23 percent to wireline, 6 percent enterprise, and 3 percent to other customers.
While ADC supplies landline network operators with copper and fiber connectivity components, cross connects and Ethernet access equipment, Andrew sells satellite and cellular base-station systems, antennas and RF amplifier systems to wireless carriers and cable operators. The companies said their combined sales for the past 12 months totaled $3.3 billion, and they expect their pre-tax earnings synergies to reach between $70 million and $80 million within three years after the deal closes. The combined company would count sales in more than 140 countries.
Although the combined company will not have to wrestle with overlaps in products lines, one analyst noted that there doesn’t appear to be an immediate benefit to combining the product lines.
“They may realize a little bit of synergy in the first year or two, but it could easily be another three to four years before they really see any noteworthy synergies, and that’s a long time to be waiting.” commented Mike Arden, principal analyst for broadband and multimedia research at ABI Research. “They will both keep selling to their respective clients, and ADC will probably find that the combined portfolio gives them more exposure, helping them attract a broader spectrum of operators to their products.”
In addition, as wireline, wireless and even cable operators explore the possibilities of network convergence, the companies indicated that they expect to gain market share by offering convergence expertise.
“The synergies that we expect to create will enable us to better serve our converging customer base worldwide as their wireline and wireless networks deliver high-speed, any-content, anywhere communications services,” stated Ralph Faison, president and chief executive officer of Andrew.
Arden agrees. “By merging their product lines, they will be able to offer one-stop shopping for operators. Down the road, this could give them a competitive advantage as it supports the idea of network convergence, which non-traditional operators, like cable operators, may find attractive should they try to make a wireless play-they will want to simplify the process as much as possible, and they will look to vendors who can help them do that.”
But are these limited gains worth $2 billion?
“The overall take is that $2 billion is a pretty high price to pay,” explained Arden. “They won’t see a return on their investment right away. ADC is going out on a limb.”
Merrill Lynch & Co. analyst Tal Liani seems to agree, stating in a report that, “while this acquisition is strategically sound, it could depress ADC’s profitability for a prolonged period, in our view.”
The investment firm downgraded ADC’s stock from a “buy” to “neutral” rating, but Liani said that despite near-term profitability concerns, “We favor this bold move by ADC. The combined company will be a large and diverse supplier of cable/connectivity products for broadband, wireless and converged triple-play deployments, with projected fiscal 2007 sales of $3.7 billion. In our view, gaining scale is critical to staying competitive in the current consolidation phase of the telecom industry.”
Arden added that clearly ADC’s acquisition of Andrew proves that “anyone who wants to be a big player in this industry is going to have to have a wireless play.”
ADC President and CEO Robert Switz, who will head the new ADC Andrew, signaled that a need to play in the wireless sector drove the acquisition of Andrew. “The wireline and wireless markets for next-generation broadband, video, data and voice services are rapidly expanding and have strong growth potential. Carriers in every part of the world are upgrading their networks to expand high-speed data and video offerings. These trends hold significant promise for the strategic combination of ADC and Andrew.”
The boards of directors of both companies have already approved the deal, which calls for ADC to own 56 percent of the combined company. Andrew shareholders will get 0.57 shares of ADC stock for each of their Andrew shares. Under the agreement Andrew will operate as a fully owned subsidiary of ADC.
The deal is expected to clear regulatory hurdles and gain shareholder approval within about six months, with ADC Andrew designating a 12-member board with four seats filled by Andrew.
Faison is expected to serve as a consultant to the combined company for about six months after the close. The fate of Andrew’s roughly 11,000 employees is unclear, but the company said some cuts are inevitable. ADC employs more than 8,000 people.
