Architect Partners LLC

M&A: Harris Acquisition of M/A-COM

Transaction Overview

Last week Harris announced that it has agreed to purchase the M/A-COM subsidiary of Tyco Electronics.  M/A-COM provides a broad set of product and services to support wireless communications within the public safety and public service, federal government, transit and transportation, and utilities sectors.  Products include network systems and software solutions; mobile and portable radio equipment; broadband WiMAX products for high speed-data applications; and operations, service and maintenance.  The purchase price is $675 million in cash structured as an asset purchase. The goodwill arising on completion of the acquisition will be an allowable tax expense with an estimated net present value of $60 million, resulting in an effective purchase price of $615 million.

Valuation

Effective Purchase Price:                                                                    $615 mm
M/A-COM LTM Financial Statistics (Sept 2008):
    Revenue                                                                                         $463 mm
    EBITDA                                                                                             86 mm

Valuation Multiples:
    Price / Revenue                                                                                   1.3 x
    Price / EBITDA                                                                                    7.2 x

Architect Partners Observations

While this would certainly be classified as a mature company acquisition, we believe it does highlight some important principals to keep in mind for sellers of all stripes, of course adapted for individual circumstance:

1. Consolidation-driven M&A will continue to show strength as companies seek to either strengthen core businesses or divest themselves of non-core businesses.
2. Financial metrics matter.  In this case, M/A-COM has growing revenues with solid profitability which is expected to be accretive to Harris within the current fiscal year.  Few, if any acquirers, are interested in anything but near-term financially accretive acquisitions in this environment.
3. While economic uncertainty and buyer valuation discipline is certainly evident, valuations achieved are not particularly low for high quality assets.

 

Theme: Healthy Ecosystem Development: Apple

The aggressive entry into mobile by Apple occurred less than two years ago.  Their impact is staggering:

1. Mobile Internet access finally done right
2. The creation of the App Store where independent application developers can offer their product to the masses
3. A transparent, consistent and fair revenue split (70% to developer, 30% to Apple)
4. 35,000 new applications created by thousands of newly created independent developers
5. Over 1 billion applications downloaded
6. Apple went from nothing to the third largest mobile phone maker globally by revenue
7. Played a major role in the resurgence of AT&T Wireless
8. Apple is now the undisputed innovation leader with everyone else playing lagging catch up
9. The iPhone transformed the cellphone into a broad application and entertainment platform

The industry transformation has just started....

 

Theme: Healthy Mobile Ecosystem Development

The mobile industry is in the midst of a major economic power transition.  Historically wireless carriers maintained tight control and disproportionate economic power within the wireless ecosystem.  This is rapidly changing and is transforming wireless into an industry where innovation is accelerating and, very importantly, economically rewarded.

We'll use this thematic heading to keep us reminded of situations and events that demonstrate this crucial trend which is a fundamental driver of the growth of our industry.