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M&A Prospects in T&M 2017

Brian Santo
1/5/2017
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Test and measurement companies have been involved in ongoing merger and acquisition (M&A) activity, though they've avoided the frenzy that the semiconductor and service provider segments have succumbed to in recent years. That might change in 2017.

Ixia (Nasdaq: XXIA) is exploring a sale, which might kick off a new wave of M&A activity in the sector, should other companies decide they need to keep up.

Ixia is not commenting on the subject. No other company has yet acknowledged it is kicking Ixia's tires, but the betting public favors Viavi Solutions Inc. as the most logical and likely acquirer. JPMorgan was among the first to voice this expectation, and Michael Genovese of MKM Partners this week shared with journalists a private analysis that makes the case that the pairing makes good financial sense. Keysite Technologies and EXFO Inc. (Nasdaq: EXFO; Toronto: EXF) have also been mentioned as possible suitors. (See Ixia's for Sale. Who Might Buy?)

Why might test companies combine? Again, the first impetus would be simply to keep up with the competition.

Also, T&M customers are combining to get larger and also sometimes to also hedge technological bets -- AT&T/DirecTV is the poster child for that philosophy. And big companies need to manage their suppliers and a great way to manage suppliers is to deal with fewer of them.

Converging technology also argues for consolidation among T&M companies. T&M vendors can no longer afford to specialize in a niche -- just cable, or just wireless. Wireline networks all seem to be converging on Ethernet. The virtual parts of different networks will be virtual in pretty much the same ways; a container is a container. As these trends progress, there will be fewer niches to specialize in and there will end up more companies in the T&M segment than necessary.

Which T&M companies might combine?

Among them, a fairly large percentage are privately held, making it a little more difficult to detect possible M&A activity. Big swings in stock valuation are often indicative of M&A rumors (lacking any other news, of course), as was the case with Ixia. There is no such activity among the more prominent public companies in the test space at the moment.

Nor is anyone showing the most obvious sign of distress -- a plunging stock price -- that often indicates a sale might be impending. It just so happens that most of the public T&M companies, including Exfo, Keysight, Advantest, Anritsu, Netscout, Sandvine and Spirent are currently trading near their 52-week highs.


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But should Viavi consummate a merger with Ixia, rivals might feel compelled to respond, the same dynamic that has helped perpetuate the waves of M&A activity in the semiconductor and service provider sectors. Should Ixia go to someone other than Viavi, Viavi might then investigate other merger options.

Exfo is open to growing through acquisition. In October it dropped $8.25 million on Absolute Analysis, a company with expertise in optical, Ethernet and RF. Almost stereotypically Canadian, Exfo is simultaneously ambitious and judicious about inorganic growth, so it might therefore be less likely to get involved in a big deal unless it is convinced it has to.

Keysight in 2015 spent a little over $600 million on Anite, which it should have digested by now. The company is strong in traditional signal-analysis-type T&M, and could branch out into monitoring, assurance, verification, data analysis and security with minimal overlap of existing operations. (See Keysight to Buy UK's Anite for $611M)

Anritsu Corp. , also based in Japan, bought RF test specialist Azimuth Systems in September. Another Japanese vendor, Advantest Corp. , hasn't been involved in a deal since 2011, when it bought Verigy for $1.1 billion.

Privately-held VeEX Inc. is the one traditional T&M company that has exhibited little public interest in expanding into assurance/security/etc., but if it feels compelled to keep up with Viavi and Exfo, it won't hesitate to deal. The privately-held company pulled off a bit of a surprise when it bought Sunrise Telecomin 2013.

Other privately held companies include Accedian , Averna , Cobham Wireless , Guavus Inc. , IneoQuest Technologies Inc. , Netrounds and Rohde & Schwarz GmbH & Co. KG , and their intentions are likewise opaque. Most of them seem happy keeping their heads down and taking care of business, but any could become acquisition targets.

Thus far unmentioned is NetScout Systems Inc. (Nasdaq: NTCT), which is apt to stand pat after bridging traditional T&M and monitoring (etc.) when it bought Arbor Networks, Fluke and Tektronix operations from Danaher (and spun a few of them back out) in 2015. That does not rule out an opportunistic acquisition if one pops up. (See NetScout: We Won't Be a House of Brands.)

Semiconductor design tool companies are in a largely distinct category, but the acquisition of Mentor Graphics by Siemens shed new light on product lifecycle management (PLM), a discipline that dovetails with the way T&M is evolving into a process -- perhaps not seamless, but certainly continuous -- from product design to commercial implementation. (See Siemens Bolsters Mfg. Ops With Mentor Buy.)

While Siemens AG (NYSE: SI; Frankfurt: SIE)'s acquisition of Mentor Graphics Corp. was unexpected, it was an alert that PLM could develop into a significant trend, and if it does, it would behoove T&M companies to take a look at Mentor rivals such as Cadence Design Systems Inc. , Synopsys Inc. (Nasdaq: SNPS), LogicVision Inc. (Nasdaq: LGVN) and even automated test equipment (ATE) manufacturers like Teradyne Inc. (NYSE: TER).

— Brian Santo, Senior Editor, Components, T&M, Light Reading


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inkstainedwretch
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inkstainedwretch,
User Rank: Light Sabre
1/11/2017 | 12:33:36 PM
And NOT by the way...
...Radcom claims to have a unique niche in NFV service assurance that may make it an attractive M&A participant.

-- Brian Santo
microcaptechinvestor
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microcaptechinvestor,
User Rank: Lightning
1/8/2017 | 9:07:57 PM
Re: Still no coverage of RADCOM?
@daniel, not sure if your reply was in regard to RADCOM specifically, or those private companies listed in the article. That said, RADCOM is public, trades under ticker symbol RDCM on the NASDAQ exchange. It's a ~$200m market cap today, $18(ish) stock and call it 12 million shares out.
danielcawrey
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danielcawrey,
User Rank: Light Sabre
1/8/2017 | 4:46:49 PM
Re: Still no coverage of RADCOM?
Good article. Hard to get insight into M&A prospects of private companies unless there is a leak of some sort. However, all signs indicate here a consolidation of some sort for sure. 
microcaptechinvestor
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microcaptechinvestor,
User Rank: Lightning
1/6/2017 | 1:07:57 AM
Still no coverage of RADCOM?
I have to repost, yet again, RADCOM landed the first NFV service assurance transformation deal w/ AT&T who endorsed RADCOM's MaveriQ solution back in August. MaveriQ scored 100/100 in AT&T lab trials, nearest competitor was 70/100 in the bake-off. Now, RADCOM disclosed on its last earnings call that it is now in 9 Tier-1 CSP trials, four of which accelerated after the AT&T endorsement, and there is ZERO competition.

 

Seems like a MUST OWN asset for many legacy players who appear to be losing out on the NFV race.
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