Update: ADC Telecom to Buy Broadband Access for $2.25 Billion - TheStreet

Update: ADC Telecom to Buy Broadband Access for $2.25 Billion

Broadband Access will contribute to ADC's product offering in Internet Protocol systems.
Author:
Publish date:

Updated from 8:15 a.m. EDT

ADC Telecommunications

(ADCT) - Get Report

, a telephone equipment maker, said Wednesday that it had agreed to buy privately held

Broadband Access Systems

, a maker of software and hardware for high-speed Internet access, for stock valued at $2.25 billion.

Under the terms of the deal, Minneapolis-based ADC will issue $2.25 billion worth of its common stock to pay for all outstanding equity interests in Broadband Access, based in Westborough, Mass.

Shares in ADC fell Wednesday, $2.44, or 7%, to close at $32.44.

The number of ADC's shares to be issued will be based on the average closing price of ADC's shares in the five trading days prior to the close. The deal is subject to a collar -- which restricts how much the deal price can fluctuate -- from $34.13 to $41.71 a share.

The deal bolsters ADC's efforts to develop products for transmitting data over broadband, or high-speed, networks. "Broadband Access Systems' products will form the cornerstone of ADC's strategy to offer next-generation Internet Protocol systems for the delivery of Internet and voice services over broadband networks," Arun Sobti, ADC's senior vice president, said in a statement.

While Broadband Access is only expected to bring in $5 million in the current quarter that ends in October, analysts who cover ADC lauded the long-term view taken by company management.

"I think they got it on the cheap," said Paul Silverstein, a senior analyst at

Robertson Stephens

. "ADC is already a player with respect to cable telephony."

Silverstein said the deal will be dilutive to ADC's earnings in the near term, but will boost the bottom line after 2001.

Silverstein said that when established companies like ADC buy up start-ups, they often take on a level of "technology risk," meaning they are investing in untested technology. But in the case of this deal, Broadband Access already has customers, including

Time Warner

(TWX)

and

Adelphia Cable

(ADLAC)

. "So the technology risk is low," he said.

By 2002, Broadband Access should add "significantly in excess" of $300 million in revenue to ADC's coffers, Silverstein said. Silverstein has a buy rating on ADC, and his firm has no underwriting relationship with the company.

Another analyst similarly praised the deal, saying it will prepare ADC for offering Internet-based voice transmission. "The acquisition looks like a good fit," said Ari Bensinger, an analyst at

Standard & Poors Equity Group

. "It will enhance ADC's product portfolio."

In an analyst conference call, ADC said it expected cost savings in research and development of about $100 million as a result of the deal, Bensinger said. Bensinger also noted the consensus among analysts is for 30% annual growth in earnings over the next five years. "This will keep that growth rate up there," he said. Bensinger rates ADC five stars, his firm's highest ranking. Standard & Poors Equity Group does not do underwriting.