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Could Aeroflex Shake Up Testing?

Light Reading
News Analysis
Light Reading
12/30/2003

Is the all-too-quiet telecom testing market about to get a little noisier?

A recent filing with the Securities and Exchange Commission (SEC) by microelectronics and testing giant Aeroflex Inc. (Nasdaq: ARXX) hints that the company is raising money for acquisitions and could emerge as a potential consolidator for the beleaguered telecom testing industry.

Earlier this month, Aeroflex filed a shelf offering with the SEC to periodically sell up to $125 million in debt and stock. The net proceeds will be used to pay down debt and for general corporate purposes, the company said in a statement.

Digging into this statement, analysts tracking the company think Aeroflex could well be on the prowl for more acquisitions, most likely in the wireless components and/or network test and measurement arenas.

Aeroflex made its mark selling rugged semiconductors to the defense and aerospace industries. Over the past two years via the acquisitions of IRF, a maker of testing equipment for broadband networks, and Racal Instruments, a maker of testing equipment for wireless networks, it has become a key player to watch in the test and measurement world.

”They’ve made a number of acquisitions; my assumption is they will continue down this path… Wireless components and test and measurement companies would be my hunch,” says James McIlree, analyst with CE Unterberg Towbin.

Indeed, if the company does have its sights on test and measurements firms, there are plenty to choose from, especially in the telecom arena. Optical testing specialist Digital Lightwave Inc. (Nasdaq: DIGL), whose stock price is in the sub-dollar range (see 2003 Top Ten: Explosions & Implosions), narrowly avoided eviction for failing to pay its rent this summer and has been struggling as key customers like AT&T Corp. (NYSE: T) have stopped buying (see Digital Lightwave Avoids Eviction, Digital Lightwave Keeps Sliding in Q1, and Digital Lightwave Borrows to Pay Bills).

Acterna Corp., recently out of Chapter 11, and with renewed focus on testing gear that helps carriers with OSS issues, might be worth a look. It has recently signed a juicy deal with Verizon Communications Inc. (NYSE: VZ) to install, develop, and maintain a series of OSSs for the carrier's voice network (see Acterna Addresses Workflow, Acterna's Extreme Makeover).

Not much has been heard from optical test and monitoring firm NetTest since it split off from its parent almost a year ago (see Nettest Leaves the Mother Ship).

And on the wireless testing front, carriers are slowly returning to the job of deploying 3G networks and will be looking for testing firms to check out the merits of this technology. The same goes for WLAN services, as this technology gradually breaks into the enterprise market. Light Reading’s sister site, Unstrung, covers this market in detail (see Dilithium, LineFusion Partner, Blazar Tests With Adax, Agilent Tests HSDPA, DTI Intros Test Transmitter, ATIO Tests ASQA, and IceFyre Tests 802.11 Chipsets).

It's worth noting Aeroflex is a company of some heft. It had $290 million in revenue for 12 months ending June 30 and has just broken back into profitability. By swallowing up smaller companies, Aeroflex would keep on the ongoing trend of consolidation in the test market and could become a major player.

In the telecom testing market specifically, other than the aforementioned smaller players, the industry is largely dominated by only two big players, Agilent Technologies Inc. (NYSE: A) and Spirent plc (NYSE: SPM; London: SPT). If Aeroflex started creeping onto their turf, things could get interesting.

Aeroflex did not return calls for comment by press time.

— Jo Maitland, Senior Editor, Boardwatch

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bonnyman
bonnyman
12/4/2012 | 11:07:51 PM
re: Could Aeroflex Shake Up Testing?
There remain big names in the telco test equipment market not mentioned in the article, starting with the "Triple-A" of Japan:
Ando (18 billion yen)
Anritsu (about 70 billion yen)
Advantest (98 billion yen).

In the U.S., there's:
Tektronix, a $791 million test and measurement giant that's been around for decades;
Agilent, (as mentioned in the article) the $6 billion spin-off from H-P that included H-P's test and measurement group; and Teradyne, $1.2 billion.

By the way, IFR Systems, one of Aeroflex' recent acquisitions, was once in the fiber test business. They owned Photon Kinetics, then later sold it to NetTest. NetTest, in turn, spun off PK earlier this year. NetTest is now about a $100 million company. Presumably there are former IFR people at Aeroflex that know NetTest pretty well.

The numbers above are for annual sales. $1.00 US = 107 yen
optoengr
optoengr
12/4/2012 | 11:07:48 PM
re: Could Aeroflex Shake Up Testing?
Don't forget that Ando is now owned by Yokogawa, which adds to its size.
farfields
farfields
12/4/2012 | 11:07:39 PM
re: Could Aeroflex Shake Up Testing?
The point of the article is 'what will Aeroflex do with $120m?". Yes, there are bigger companies, but it's questionable whether they have the resources or nerve to go on the acquisition trail. Aeroflex has a recent history of doing just that. Key factors in the T&M business are that the so-called big companies do not have a dominant position, and there are many many small niche players. Agilent's telecom test business is centred around a core product group for protocol and optical analysis. As such it suffers from heavy competition from Acterna and others. Until Acterna either folds or returns to profit no company with the same product range will be healthy. I recall seeing an analysis of the telecom test sector some years back that showed (quite obviously) that the biggest player was HP (pre-Agilent), followed by Tektronix at a smiliar size, then the next largest company was WG but at just 40% of the size, followed by others of reducing size. The lesson was that the industry is made up of many small niche players that needed to be merged. There then followed the mergers of WG, Wavetech and TTC into Acterna in an attempt to reach critical mass. Acterna has spun out of control and is still not in stable orbit! So, what of the niche companies - ripe for consolidation. It's just a matter of who and when.

And as for the spout offs from Bobbymax. Let them repeat, the comments are from dust off the stairs.

regards.
BobbyMax
BobbyMax
12/4/2012 | 11:07:39 PM
re: Could Aeroflex Shake Up Testing?
In general the telecom testing market is expanding.The telecommunications market is booming, opening new markets for test and measurement products. Some of these new markets include ADSL, ATM, Internet, all optical networks, WDM, HFC, premise wiring, Gigabit Ethernet, 1394 and scores of other technologies
Iipoed
Iipoed
12/4/2012 | 11:07:38 PM
re: Could Aeroflex Shake Up Testing?
Bobby-once again, YOUR POINT IS?
bonnyman
bonnyman
12/4/2012 | 11:07:38 PM
re: Could Aeroflex Shake Up Testing?
In a well-informed post, fairfields wrote:
Key factors in the T&M business are that the so-called big companies do not have a dominant position, and there are many many small niche players. Agilent's telecom test business is centred around a core product group for protocol and optical analysis. As such it suffers from heavy competition from Acterna and others. Until Acterna either folds or returns to profit no company with the same product range will be healthy. I recall seeing an analysis of the telecom test sector some years back that showed (quite obviously) that the biggest player was HP (pre-Agilent), followed by Tektronix at a similar size, then the next largest company was WG but at just 40% of the size, followed by others of reducing size. The lesson was that the industry is made up of many small niche players that needed to be merged.

One of the interesting things about the test and measurement industry is that there are inherently many niches. A small start-up with a superior idea can bootstrap itself into niche dominance with little capital.

I did something like this myself 10 years ago in the electric power measurement field using several hundred thousand dollars. It would have been somewhat harder in the telecom industry because the marketing expenses are higher -- the buyers are more concentrated and erect higher barriers to entry. To succeed, you have to use a direct sales force, not manufacturers' reps), and be prepared to wait several years for significant sales.

Nevertheless, in the telecom T&M area, you can probably start-up a successful test equipment company and achieve niche dominance for perhaps $3 million -- if you have a superior idea and execute well. That's probably not true of any other telecom equipment sector.

So regardless of the acquisitions Aeroflex makes, I think there will always be new niches and new players in telecom T&M as long as there's still innovation in telecom in general.

Final caveat -- what I've written applies to anything that doesn't have to tie into Bell OSS systems. If a product has to tie into a Bell OSS, the capital requirements skyrocket due to OSMINE.
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