Mercury Computer Systems, Inc. [MRCY], on Sunday said it has agreed to acquire Micronetics, Inc. [NOIZ] for $71.7 million in cash in a deal that would move it up the value chain in terms of radio frequency and microwave subsystem content while gaining more program access and customers.
The transaction is subject to approvals by United States regulators and Micronetics shareholders and is expected to close by Sept. 30. The pending deal has an enterprise value of $75.4 million, which includes $3.7 million in Micronetics net debt.
While the two companies are competitors there is little overlap in capabilities and in customers, Mark Aslett, Mercury’s president and CEO, said during an investor call yesterday to discuss the acquisition.
Micronetics, which had $46 million in sales in its latest fiscal year, counts ITT Exelis [XLS], Britain’s BAE Systems, and the TECOM Industries unit of Britain’s Smiths Group as its three largest customers, accounting for 36 percent, 13 percent and 5 percent respectively of sales. Mercury has worked with BAE before but the pending acquisition would significantly expand its work with the large defense contractor, Aslett said.
About 78 percent of Micronetics’ sales are defense-related. The rest of the sales are to commercial customers for wireless and non-wireless communications used in test systems.
Mercury’s three largest customers are Raytheon [RTN], Lockheed Martin [LMT] and Northrop Grumman [NOC].
Aslett said the acquisition is both customer and market driven. It is market driven in terms of their being long-term demand for RF capabilities as part of current and future program upgrade cycles for electronic warfare and intelligence, surveillance and reconnaissance systems.
The deal is customer driven due to changes in defense contracting environment.
As for the defense prime contractors, they “are increasingly asking for fully integrated sensor processing solutions…that combine RF and signal processing capabilities into a complete and fully integrated open architecture subsystem and in addition come from commercial companies that don’t, or won’t, compete with them,” Aslett said.
In the past the prime contractors have purchased their RF and microwave components from hundreds of small suppliers, and then done the integration work in-house, but with defense budget constraints, procurement reform, the prime contractors are downsizing their organizations “and consolidating their supply chains,” Aslett said. “They are looking to outsource at the subsystem rather than the component level. This leaves the subsystems integration to best of breed commercial companies like Mercury that can deliver more timely and more affordable end to end sensor processing solutions.”
Aslett said the deal for Micronetics will give Mercury the scalability in terms of engineering and manufacturing to meet the shifting demands of the defense primes. He also said that additional acquisitions by Mercury will be aimed at further “scaling the platform” either in RF or processing, adding more defense revenues and access to defense programs, and finding cost synergies.
Mercury said the acquisition is expected to be accretive to net income within 12 months of closing although the company is updating its financial outlook at the moment. Micronetics had $3.4 million in net income in its FY ’12 and has a backlog of $26 million.
Mercury expects sales in its current fiscal year, which ends on June 30, of between $244 million and $250 million.