Updated from 9:41 a.m. EST
, a maker of network hardware and software, said Wednesday that it will acquire
in an all-stock deal valued at around $1.6 billion.
The deal will build on ADC's position as a supplier of networks and networking connections that allow quick transmission of large volumes of data, known as broadband. PairGain specializes in building systems that use a broadband technology called digital subscriber line, which uses existing phone lines but transmits data many times faster than regular modems.
Under terms of the agreement, each share of PairGain common stock will be converted into 0.43 share of ADC common stock, with a fixed exchange ratio. Based on the 46.81 per share that ADC was worth at the close of trading Tuesday, the deal is valued at about $1.6 billion.
Minneapolis-based ADC does not expect the acquisition to dilute its earnings per share in fiscal 2000, and forecasts a 5-cent-per-share contribution to earnings in fiscal 2001. ADC said it will report a one-time charge for acquisition-related expenses, but did not disclose the amount.
Tustin, Calif.-based PairGain had 1999 net earnings of $2.4 million, or 3 cents per diluted share, on sales of $225 million through its 1.7 million DSL customers around the world. ADC had 1999 operating earnings of $206 million, or $1.34 a share, on revenue of $1.93 billion.
ADC said the proposed acquisition reflects its aggressive strategy to boost its presence in the DSL market. Industry watcher
The Yankee Group
projects the market for such services to grow about 47% annually through 2003.
In a statement, William J. Cadogan, chairman and CEO of ADC, said the acquisition "enhances ADC's 'triple play' package of network equipment, software and integration services used by service providers to compete in the 'last mile' of communications networks."
In midday trading Wednesday, ADC was down 3 5/8, or 8%, at 43 3/16. PairGain was up 1 5/16, or 8%, at 17 3/8. (ADC closed down 2 13/16, or 6%, at 44, while PairGain closed up 1 7/16, or 9%, at 17 1/2.)
Analysts said the decline in ADC likely reflected investors' caution over ADC's belief that the acquisition will not dilute ADC earnings.
Although the companies' businesses fit well, some analysts say it will be a tough job for ADC to squeeze a significant profit out of its new acquisition. PairGain was an early player in the DSL market, but its earnings have been sagging in recent years due to stiff competition.
In its 1999 earnings statement, the company attributed an overall slump in margins to "price erosion across all product lines." Revenue in 1999 from the company's T-1 access products, which make up about half of its sales, fell by 33% despite a 2% increase in shipments.
One of the largest setbacks for PairGain was the late 1998 loss of an exclusive contract with
for DSL services and technology. Rival DSL company
eventually won the Bell Atlantic contract, but not before the companies slashed prices by about 30% in a bidding war.
However, analysts said that other PairGain technologies could give ADC an immediate advantage in the broadband sector.
"On its own, PairGain didn't have a great year last year, but it could offer some breadth to ADC's channels," said Mike Latimore, analyst at
John G. Kinnard & Co.
who covers ADT and has not done any underwriting for the company.
In particular, ADC will likely benefit from promoting PairGain's new Avidia system, a telephone network switching technology.