Tyco Electronics’ acquisition of ADC pleases ‘The Street’

Tyco Electronics’ pre-market announcement Tuesday that it would acquire ADC Telecommunications for $1.25 billion, or $12.75 a share, sent the 75-year-old Eden Prairie-based company’s stock soaring as traders and investors took advantage of the hefty premium offered over ADC’s previous closing price.

ADC (Nasdaq: ADCT) was the largest price gainer on the market, up 41.47 percent. It was the fourth most active for the day with 111 million shares traded, an eye-popping 26 times its average daily volume. The stock settled at $12.52, up $3.67 a share, a bit below the offer price as traders discount the deal, which is expected to close late this year.

ADC Telecommunications has been a fixture in the Twin Cities tech community since 1935, when Ralph Allison invented the audiometer in the basement of his south Minneapolis home. The electronic device is used to test hearing.

Over the last decade, the company made a bigger splash locally than its size would have indicated as it rode the digital boom, becoming a “hot stock” and a leader in equipment and software for telecommunications, cable television, broadcast, wireless and computer networks.

Its ambitious 477,000-square-foot Eden Prairie headquarters campus, with three-story atriums and open workspaces, attracted attention in architectural circles as an example of a “21st Century workplace.” But that showplace opened in 2002, after the Internet bubble had burst, and ADC had to retrench, downsize and scale back further planned development of the campus.

The company currently employs 9,000 worldwide, including about 1,000 in Minnesota. At the start of the decade, it employed nearly 23,000.

While the stock of acquiring companies often fall after a new deal is announced, this acquisition seems to make sense to Tyco’s shareholders as well, who bumped that stock up 2.5 percent on nearly double its daily volume.

In a call with analysts and investors Tuesday, Tom Lynch, CEO of Tyco Electronics (NYSE: TEL), said that the acquisition will strengthens its ability to capitalize on continued growth in wired and wireless networks by broadening their product offerings and providing greater geographic diversity. He also noted that combined, the two companies currently invest $100 million a year in research and development.

In addition to the portfolio of networking products, Tyco will add ADC’s Distributed Antenna System (DAS) products and its U.S. professional services organization.

Tyco Electronics, headquartered in Berwyn, Pa., derives one-third of its revenue from Europe, and has a large presence in the automotive industry, both of which are a concern to investors worried about macroeconomic trends, according to Longbow Research equity analyst Shawn Harrison. By way of contrast, almost 60 percent of ADC’s revenue comes from the Americas, and telecom giants AT&T and Verizon together represent 37 percent of their business, according to company filings.

Harrison, who has a “buy” rating on the stock, views the acquisition as a positive for Tyco Electronics, which has been in a multi-year divestiture mode since the breakup of Tyco Inc. into three separate companies in 2007.

The ADC acquisition was “a much bigger deal than many [investors] expected,” he added. “It made a much bigger splash. They’re telling the market, ‘You’re going to see more acquisitions going forward.’ ”

In addition to synergies from reducing administrative overlap, “this [acquisition] adds $1 billion of revenue that is not in automotive or geographically concentrated” in Europe, Harrison added.

Tyco CEO Lynch, in a prepared release, said: “ADC is a great fit as we continue to execute our strategy to create strong leadership positions in all of our connectivity businesses. Consumers and enterprises want access to high-speed video and data wherever they are, on whatever devices they are using — from smart phones to HD and 3-D televisions to computers with advanced video-conferencing capabilities. The combination of ADC and Tyco Electronics creates an industry leader, with the scope and geographic scale to help customers deliver needed capacity, from the core of the network all the way to the end user.”

While no ADC executives participated in the teleconference call with analysts, a spokesperson for ADC, Mike Smith, in an email exchange said that [ADC Chairman, President and CEO] “Bob Switz is committed to ensuring a smooth integration and transition, and then is expected to retire once the integration process is well under way. Certain other members of ADC management will join the Tyco executive team, but we don’t have specific details at this time.”

Under terms of the definitive agreement, the transaction is structured as a tender offer to be followed by a merger.

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