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Dilution Doesn't Scare ADCT Fans

Light Reading
News Analysis
Light Reading
9/21/2000
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Shares of ADC Telecom (Nasdaq: ADCT) rebounded today, dispelling some fears about the dilution resulting from its announced acquisition of Broadband Access Systems for $2.3 billion.

ADC rose 1.47 points (4.53 percent) to $33.91 in morning trading. A common contrarian theme ran through analyst activity following the deal: The stock's down, so it's a good time to buy. ADCT is a multibillion supplier of wireless, cable, DSL, and fiber-optic gear and integration services. The company today announced it was opening a new manufacturing facility in Nanjing, China.

Investors were intially lukewarm to the idea of the Broadband Access acquisition, based on fear that the expensive stock swap would result in costly earnings dilution. But such moments also present a buying opportunity for the investor who believes the company will successfully integrate the startup's product line.

ADC gave specific guidance on the impact of the Broadband Access acquisition, saying it expects to take a $0.02 per share hit on earnings in the fiscal fourth quarter. The company expects the deal to be $0.07 to $0.08 dilutive to fiscal 2000, and $0.05 to $0.06 dilutive to fiscal 2001.

Some analysts liked the acquisition, saying it will help ADC capitalize on its fastest growing sector -- broadband access equipment.

"This acquisition strategy, the latest in a number of deals for ADC, should help the company capitalize on expected growth in demand for high-speed Internet-based access services over cable modem and Digital Subscriber Line (DSL) networks," wrote Nikos Theodosopoulos, analyst with UBS Warburg, in a report issued this morning.

For the nine months ending July 31, ADC's sales rose 49 percent to $2.26 billion. Net income totalled $799.9 million, up from $47.6 million. Results reflected a gain on the conversion of the Siara Systems investment. Redback Networks Inc. (Nasdaq: RBAK) this year purchased Siara for $4.3 billion.

"We reiterate our 1-Buy rating and believe the recent share price weakness and strong underlying fundamentals makes ADC a compelling investment opportunity," wrote Steve Levy, analyst at Lehman Brothers.

Briefing.com, a Web-based equity research site, also liked the deal. "The deal will bulk up ADC's Broadband Connectivity segment which already represents 58 percent of sales," according to Briefing.com. "This segment has been the crown jewel for the company as sales in the most recent quarter were up 120 percent year over year." -- R. Scott Raynovich, Light Reading http://www.lightreading.com

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