Tyco Electronics Buys Reseller-Centric ADC, But Analysts Wonder Why

Spurred by fiber build-out opportunities overseas and the broadband stimulus program in the United States, Tyco Electronics said on Tuesday its buying ADC Telecom for $1.25 billion. Investors hailed the news, sending both companies shares soaring, but analysts seemed less convinced that the pairing makes sense especially for Tyco Electronics.

The deal could be a high-risk proposition for Switzerland-based Tyco Electronics, Ticonderoga Securities analyst Brian White told clients in a July 13 memo. Thats because ADC, a network-solutions company headquartered in Minnesota, has “an inconsistent profit history and a highly cyclical business.” Tyco Electronics, meanwhile, is a connector vendor that runs a network solutions arm as part of its overall business ADC falls outside of that emphasis. Yet now,Tyco Electronics wants ADC so it can hone in on 3D TV, smartphones and video conferencing; however, that news comes as Tyco Electronic has spent the past several years selling non-core assets so it can focus on connectors, White wrote. The buyout announcement, then, seems a bit of a backtrack.

Tyco Electronics plans to add ADCs distributed antenna systems products to its wireless connectivity lineup, to give carriers and enterprises greater mobile coverage and capacity. Tyco Electronics further will put ADCs U.S.-based professional services group into the mix. This could create the consistent execution and improving financial results that UBS analyst Nikos Theodosopoulos said ADC needs to thrive, and to earn a buy rating from the investment bank. UBS has placed ADCs ratings under review.

Over at Ticonderoga, White maintained a neutral rating on Tyco Electronics. Even though Tyco Electronics said it expects third-quarter sales of $3.1 billion, White worries about performance over the next six to 12 months. Tech spending in this rocky economy remains unpredictable, as does consumer outlay. Raw material prices are fluctuating and Tyco Electronics, in the midst of the ADC integration, will keep doing some restructuring. And, theres a lot of inventory in the channel pipeline. To that point, Tyco Electronics did not immediately return a request for comment on the companys plans for ADCs reseller channel.

Tyco Electronics wants to wrap up the $12.75-per-share-in-cash takeover of ADC in the fourth quarter. Executives did not detail the combined companys structure and whether Robert Switz, chairman, president and CEO of ADC, will keep his job. The firms could face some legal obstacles on the way toward closing, too New York law firm Bernstein Liebhard LLP said it was investigating whether ADC agreed to a too-low purchase price and is seeking shareholders willing to join a lawsuit.

Wall Street didnt seem to heed that hiccup, though. By 3 p.m. Eastern, shares of Tyco Electronics had risen 3.52 percent to $26.17, and shares of ADC ballooned 41.33 percent to $12.51.