CommScope/Andrew Combination Big Blow to ADC

Implications: 1.At solely the strategic level, ADC’s approach has not been so bad.

2.The idea has been to own as much of the connectivity space as possible, so that it can beat up the direct competitors.

3.However, as pointed out in an earlier article, there is a lack of a solid growth engine.

Analysis: The ADC leadership believes in making substantive mergers in order to better leverage its core business. But they have to be big amalgamations because going after a little, insignificant company is not going to add much value or substantially change its competitive position. With its heavy emphasis in the wireless space, Andrew was perceived to be an ideal match that fit in nicely with ADC’s overall philosophy.

Of course, after the announcement, the stocks of ADC and Andrew got hammered. The proposed merger unwound.

Andrew arguably has more synergies with CommScope than it does with ADC. Most importantly, the two together become a much bigger force in competing against ADC. And so they will able to possibly bring more resources to bear on their connectivity equipment, as well as potentially outspend ADC to achieve more innovation.

ADC will likely just do more of the same – chug along and strive to remain profitable.

Right now its really only area of growth is in the FTTX arena – everything else is kind of static. The corporate board has shown a propensity to be loyal to people and as long as the CEO does not make an egregious error, he is likely to remain safe in his job – along with his current strategy.

The problem that investors are going to have with the supplier is that it does not pay a dividend and it is not much of a growth stock. Earnings certainly exceeded last time’s projections, but a lot of that was generated by the stock sold after BigBand went public.

The previous one-for-seven reverse split kind of masks ADC’s true situation. Compared with Corning (albeit with a much more diversified business) and even with struggling Tellabs, the value of ADC’s stock has remained very depressed.