Andrew Swallows Allen

A new force in the wireless equipment market emerged almost unnoticed last week when Andrew Corp. (Nasdaq: ANDW) completed the acquisition of Allen Telecom Inc. in a stock-for-stock deal that was valued at $500 million when the deal was announced in February 2003. The new company has combined annual sales of $1.4 billion and is now the world’s largest and most diversified supplier of radio components -- known as radio frequency (RF) subsystems -- for base stations, according to Andrew's CEO Ralph Faison. The chart below ranks the major RF subsystem vendors by market capitalization.

RF Subsystems include components and modules, such as antennas and power amplifiers, which are fundamental to the construction of wireless base stations. And, although they're often not keen to admit it, just about every network equipment vendor relies on the makers of these products to build their own original equipment designs. Subsystems are also purchased by wireless carriers that need to expand the coverage and capacity in networks that are already deployed and generating revenue.

Following the deal, Marty Kitrell, vice president of strategic planning at Andrew Corp, says around 45 percent of Andrew’s business will come from wireless network equipment manufacturers and 55 percent from sales to wireless carriers, a balance he says the company is very comfortable with.

Kitrell also points to the breadth of the company’s portfolio and its market-share position across a range of product groups, saying that “purchasing power and global footprint are core competitive advantages for us.”

Table 1: Andrew Corp�s Market Positioning
Market subsector Rank
Antennas 1
Coaxial Cable 1
Power Amplifiers 2 � behind PowerWave Technologies Inc. (Nasdaq: PWAV)
Geolocation Systems 1
RF Filters 2 � behind Filtronic PLC (London: FTC)
In-building Systems 1
Source: Andrew Corp., Unstrung Insider

Rich Valera, a securities analyst who follows Andrew Corp. for Needham & Co., expects the deal to yield cost-cutting benefits for Andrew because “the two companies have significant geographical overlap and a number of manufacturing facilities around the world that can be consolidated.”

Valera says he doesn’t think the fact that Andrew’s stock has dropped nearly 10 percent in the past five and a half days is related to the close of the deal. “It’s just been a very rough market for equipment stocks over the past few days,” he says with reference to last week’s financial reports from Nokia Corp. (NYSE: NOK), Motorola Inc. (NYSE: MOT), and others (see: Nokia Charge Nips Profits and US Vendors Down but Not Out).

Both Andrew and Allen are themselves products of a series of acquisitions and, according to the current Unstrung Insider report, “W-CDMA – Disrupting the Technology Chain,” this latest deal is simply part of ongoing consolidation within the sector. The report also argues that the trend towards outsourcing base station components by network equipment vendors will support demand for high-performance RF subsystems, even though the infrastructure market as a whole is in decline.

Don’t, however, make the mistake of thinking this sector is in anyway sexy or glamorous. “We like to think of ourselves as the plumbers of RF,” explains Kitrell.

— Gabriel Brown, Research Analyst, Unstrung

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