Comtech to Acquire TeleCommunication Systems for $431 Million
TeleCommunication Systems (TSYS) has agreed to be acquired by Comtech Telecommunications (CMTL) - Get Report for $430.8 million, after years of struggle and pressure from activist investors.
Comtech Telecom and TeleCommunication Systems jointly announced Monday that Comtech has agreed to acquire TeleCommunication in a cash deal for $5 per share. The price represents a 13.9% premium to Comtech's closing price of $4.39 on Nov. 20.
Shares of TeleCommunication jumped nearly 13% Monday morning to $4.94, assigning Comtech a $302.7 million market capitalization. Meanwhile, Comtech shares dropped almost 10% Monday morning to $20.29, giving the buyer a $327.3 million market cap.
For the Annapolis, Md.-based Comtech, the sale comes almost four months after it announced that it had retained Lazard as its financial adviser for a review of strategic alternatives.
Company followers said then that although TeleCommunication had struggled for a long time, particularly with its growth margins, its emergency 911 business and satellite assets could garner interest from strategics including Comtech Telecommunications.
"We expect that enough investors will be satisfied with the ultimate outcome for [TeleCommunication] to complete the merger," wrote Ladenburg Thalmann & Co. analyst Glenn Mattson in a Monday note.
Mattson added that TeleCommunication is likely a good fit for Comtech because it will allow the buyer to diversify its revenue away from federal government, adding that the buyer will also benefit from the target's next generation 911 products and satellite businesses.
For TeleCommunication, based in Annapolis, Md., the sale also comes following continuous pressure from its activists.
Activist investor Carlo Cannell has been agitating for change for a few years, filing a document with the Securities and Exchange Commission in 2012 that included a letter to the company's board urging it to start a process to "monetize" its assets.
In 2014, Cannell's firm, Cannell Capital, formed a group called the "Concerned Shareholders of TSYS" that reserved the right to take action against the company, including pushing the company to consider strategic options. Cannell Capital holds a 6.3% stake in Telecommunication Systems.
In November 2014, another activist fund, Becker Drapkin Management, reported a 6.7% stake in Telecommunication and said it may nominate dissident directors to the company's board. Two months later, Becker Drapkin launched a proxy contest, the company expanded its board from eight to nine members in February and installed two dissident directors nominated by the activist fund.
Earlier this year, Cannell released a 60-page presentation, arguing that change was necessary due to a variety of factors including a "history of misguided and poorly executed" acquisitions.
Meanwhile, the TeleCommunication purchase comes less than a year after Comtech Telecommunications itself went through a strategic review after receiving interest from a third party and called it off late last year.
Industry followers suggested then that the satellite communications company of Melville, N.Y., which only had a short list of potential suitors, could next emerge as a buyer of small- to medium-sized players in the market.
In fact, Comtech said in its announcement that in addition to scale, having TeleCommunication will create a more diversified source of revenue by providing entry into the commercial markets and reducing volatility associated to international business conditions.
"The TCS board of director and management believes this strategic combination with Comtech is compelling and provides significant benefits for our stockholders, customers and employees," said Maurice Tosé, president and CEO of TeleCommunication, in a statement.
Comtech president and CEO Stanton Sloane said in the statement that the acquisition is a "significant step" in its strategy of entering complementary markets and expanding its domestic and international offerings.