For Subscribers

Get the complete article now!

TWST: What is the environment for mergers and acquisitions, and at what point will the activity levels change?

Mr. Valera: In general, you can characterize this as a good environment for M&A activity. Whenever companies go through a period like this, where you have numerous players in the industry struggling and unable to finance their business plans by themselves because of lack of access to capital, you are going to see some consolidation. That makes for a pretty healthy M&A environment. We think you will see this type of activity across the board in cellular infrastructure, fixed wireless and satellite.

TWST: Historically, has it been more advantageous to hunt for potential targets or has it been a better strategy to look at the strong companies that might be doing the acquisition?

Mr. Valera: Generally speaking, unless you have some proprietary information, it is really speculative to buy these companies because you think they are takeover candidates. We would definitely favor looking at the strong companies that stand on their own merits and don’t need to be acquired. Our strategy would be going after the survivors — the companies that we think will be standing when this all shakes out.

TWST: Have you another higher rated choice in these areas?

Mr. Valera: A lot of these companies straddle both areas. REMEC, Inc. (Nasdaq:REMC) provides subsystems and components in the wireless equipment area. They have about 30% of their revenue coming from the cellular equipment market, and another roughly 40% coming from the broadband fixed wireless market, with the balance coming from defense. So they are a well diversified company across multiple industries. REMEC has been a consolidator in the microwave component and subsystem business. Over the past several years, they have acquired numerous smaller companies and have achieved quite a bit of scale. They are attempting to acquire Allgon, a Swedish company, that would give them significantly more scale and would be a strategic positive for them by giving them a major presence on the European continent. That merger could be somewhat in jeopardy because REMEC’s share price has been punished quite a bit since they have announced that merger due to both market conditions and some downward revision of earnings guidance by REMEC. Strategically, we think REMEC is in a very good position with or without the Allgon acquisition. They are well diversified and, generally speaking, we think will continue to be a consolidator in that industry.

TWST: Overall, how do these companies and these groupings fit into an investor’s portfolio?

Mr. Valera: That is an interesting question. We have used cellular infrastructure players as a relatively safer place in the group from an end market perspective because we think the growth fundamentals are best there. However, you do tend to pay up for the better stocks in that area. Some of them are trading at some pretty lofty valuations right now. For clients who are more focused on quality, and perhaps earnings momentum, we would probably put them in that area, with the higher quality stocks. A lot of the fixed wireless companies are severely beaten down, really looking quite inexpensive now, and from a momentum standpoint or a technical standpoint don’t look as good. Surprisingly, a lot of these are beginning to look like value stocks. So for those who are a little more willing to take some risks on the end market side (at the same time probably getting a much cheaper looking stock), we would focus more on the fixed wireless companies.