“In this acquisition deal, both sides win,” declared Microsemi Corp. (Nasdaq: MSCC) president and CEO James J. Peterson earlier this week, after his company announced last week that it would acquire Israeli power-over-ethernet (PoE) technology specialist PowerDsine (Nasdaq: PDSN).
Microsemi, which manufactures and markets analog and mixed-signal integrated circuits, and discrete semiconductors, will pay $245 million for PowerDsine, 18% higher that its market cap on the day of the announcement of the deal. PowerDsine, headquartered in Hod Hasharon, develops integrated circuits and modules for the transmission of electricity over Ethernet networks.
“The acquisition of PowerDsine is a strategic-technological move,” says Peterson. “It is a leader in PoE and it has next-generation technological products. I must stress that we looked at a number of companies, and we found that PowerDsine has the best engineering group around. This is an entirely new field for Microsemi, and it is getting an entirely new technology in the PoE field. The entry to new markets creates added value for us, in addition to which, we have gained a new set of customers.”
Globes: What made you decide to make an acquisition now?
Peterson: “Sometimes you can’t explain timing. PowerDsine had reached a stage in its life where it was looking for way to speed up its market entry, while Microsemi was looking for next-generation technology, so it all worked out. After researching the issue thoroughly, we found that Israel appears to do things the right way, and this is a fantastic place to grow in.”
Headquartered in California, Microsemi has a number of branches across the US, and has a manufacturing plant in Shanghai, China. It is active in two separate fields: high-reliability discrete components for the military and aerospace industries, and analog mixed-signal integrated circuits for telecommunications and computers. PowerDsine will focus on the latter field as a Microsemi division.
“Our plan is to make PowerDsine technological leaders,” declares Peterson. “We have a technology center in California, which will be integrated with the PowerDsine group, and we hope that together we will be at the forefront of technological development.”
Will the integration with the California center lead to job cuts in Israel?
“No. There will always be scope for structural change, but we do not intend to fire people. Our message to PowerDsine employees is this: whatever you did well up to this point, we expect you to continue doing tomorrow, and even better. We will continue to invest in development.”
If it were left up to Peterson, the PowerDsine management would also be assured of retaining their posts. “I hope the management stays just as it is for the next 10-20 years,” he says. “If we continue to do well, there’s no reason why this shouldn’t be the case. Naturally, sometimes the company founder wants to move to an advisory role after a year or two. He may well fancy my job at some point in the future,” he adds in jest.
PowerDsine was co-founded in 1995 by CEO Igal Rotem, and president Ilan Atias. The company operates in two fields: midspan products which enable Ethernet networks with switches that do not have power-over-Ethernet capabilities to transmit power over Ethernet cables, and chipsets for switches integrated in various electronic products. The midspan field caused PowerDsine considerable difficulty last year. It had to publish a profit warning in the fourth quarter of 2005, following the fall in sales of midspan products, and was subsequently forced to introduce a restructuring process that include cancellations of projects and job cuts. It has finally became profitable again after three loss-making quarters.
Asked to comment on midspan, Peterson is unequivocal. “Midspan is not dead,” he says resolutely, “business in the field is strong and I don’t foresee any change here.”
“As far as PowerDsine is concerned, Microsemi was the best possible choice,” says Igal Rotem. “Our goal is to maintain our identity and company profit, and this was one of our considerations when we made our choice. In a medium-sized company like Microsemi, we will have influence and we will not disappear. Our employment philosophies are similar too. The employees are our most important asset. Microsemi’s product line is synergetic to ours, and the overlap between the two is very small, so we believe that we can strengthen our position.” Rotem stresses that an acquisition was not PowerDsine’s aim. “It is merely a means through which to achieve long-term goals that will consolidate our leadership in power management.”
Microsemi currently has a market cap of $1.4 billion. Recently, it lost almost 30% of its value, following the lowering of estimates for the fourth quarter. “The market has weakened slightly after 13 consecutive growth quarters, but our business is secure,” says Peterson. “I don’t like to make predictions about stock price. It depends on two things - performance, which has to be in good form or the market will punish us, and the state of the market, since if competitors announce that they are having difficulties, our stock price could also be hurt.”
Microsemi’s stock price actually fell 8% following the announcement of the PowerDsine acquisition, but since then it has rallied and is now trading at a price higher than on the date of the announcement. “Igal and I sat down with investors and explained the bond between the two companies,” says Peterson. "We told them about the technology-friendly environment in Israel and the tax aspects of the deal. I already felt better the next day when the stock gained 15%.” Peterson expects that PowerDsine will grow by 32.9% in 2007, with revenue coming of $47 million.
Both Microsemi and PowerDsine expect to complete the acquisition as soon as possible, and have set the first quarter of 2007 as their target for closure. “We promise to work hard to make this deal a success,” says Peterson. “The burden of proof is on me.”
“We hope to reach closure quickly and start work,” adds Atias. “As a rule, Israel has good engineers who can call on the experience they gained while in military service. They then translate this to civilian technology. Israeli companies have more of a problem when it comes to global marketing and that’s where Microsemi comes in.” Atias believes that PowerDsine’s costs in the newly integrated company will be low since, among other things, it will not have to incur the costs that a public company has.
Several months ago, PowerDsine announced that it was developing a new product line, not connected to PoE and data communications, but more suited to the consumer market. The company added that the market for the products was huge. The veil of secrecy surrounding these products has still not yet been lifted. “It’s too early to talk about it” says Peterson. “I don’t like mysterious products too, but the message to the market is that the products do exist, Microsemi knows this market, and we believe that we will be successful.”
What about Cisco Systems? Will it finally become a customer for PowerDsine’s products?
“We’ve talked to them and they realize that PowerDsine’s technology is far superior to that of the competitors. As part of Microsemi, PowerDsine will have much larger platforms, and I’m sure that it will eventually happen. It’s not a question of if, but when.”
What can you tell us about the negotiations for the acquisition of PowerDsine?
“I reached the conclusion that I wouldn’t want to ‘wrestle’ with Israeli businessmen - they’re strong (laughs). But seriously, both sides wanted to make the best deal possible. Each side stood his ground on some of the issues on the agenda, and gave way on others. There was mutual respect, which is the most important part of negotiations. Aside from the importance of the technology, most of the decisions reached during the negotiations actually centered around people, both those at PowerDsine and Microsemi.”
In your view, could PowerDsine have survived on its own, or was an acquisition inevitable?
“PowerDsine’s employees are survivors. The company did not have a cash problem and it has good technology. Having said this, a public company has a lot of expenses and I have no doubt that PowerDsine will benefit from the acquisition by Microsemi. We plan to retain the PowerDsine name and logo once it becomes a Microsemi division.”
PowerDsine was Microsemi’s first acquisition in Israel. Are there any more in the offing?
“Israel is doing some excellent work in technological education, and from this aspect, it is a very friendly country. I am not saying that this is not the situation in the US, and I am not about to announce that ‘we are leaving the US’, but I am sure that there are more interesting companies over here, and we are certainly seeking further opportunities for growth. I have already had phone calls from people telling me, “if you’re already in Israel, you must meet this company and that company.’ It’s a natural process.”
Published by Globes [online], Israel business news - www.globes.co.il - on November 1, 2006
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