• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Beaverton, Ore.-Based Tektronix Bets on Telecom Growth

Posted on: Thursday, 14 October 2004, 06:00 CDT

Oct. 14--The flood of emerging voice, video and data technologies is radically easing the flow of information from one person to another. But for those who manage the digital pipes and wireless networks carrying that information, the job has never been more complicated.

In that complexity, Tektronix Inc. sees opportunity. The Beaverton company completed a $495 million buyout of Texas-based Inet Technologies Inc. last month, betting that growth in telecommunication services will force service providers increasingly to depend on the kind of network-monitoring systems Inet makes.

The Inet purchase is the biggest acquisition in the history of Tektronix, the grandparent of Oregon and Southwest Washington's tech industry. The buyout follows several years in which Tek narrowed its focus and sold company divisions to concentrate on a core market of test-and-measurement equipment, the business on which Tek was founded in 1946.

The Inet purchase broadens its scope, but only slightly. Mainly, the deal intensifies the company's focus on communications technologies, which now generate close to a third of company revenue, and provides a potentially more profitable software complement to its hardware core.

Tektronix's stock has been sliding for several weeks, hurt by accumulated doubts about the strength of the high-tech industry's recovery. With Inet on board, Tek thinks it has the tools to capitalize on growth in new services that send phone calls, video and ever more data over networks built on Internet technology.

Tektronix is primarily a hardware company. Electronics makers and others use its equipment to test new products, many of them telecom devices. Inet makes software used by telecom companies to monitor communications networks and continually ensure phone calls and data reach their appointed destinations.

That's where Tektronix sees the two companies complementing each other. By selling Tektronix equipment used to set up and repair networks, along with the Inet software used to monitor them, Tek expects to expand its customer base and do more to mine revenue from new communications technologies such as next-generation wireless phones and phone calls over the Internet.

"It's a natural fit based on where the market is going in the future," said Rick Wills, Tektronix's chairman and chief executive officer.

Inet had sales of slightly more than $100 million in 2003 and has been profitable every year since it went public in 1999. It brings to Tektronix a list of customers that includes many of the biggest companies in the telecom industry -- among them, AT&T Corp. and European giants British Telecom and Deutsche Telekom.

For such companies, network management becomes increasingly important as the networks become more sophisticated, said Kevin Keough, formerly Inet's vice president of strategy, now in a new position with Tektronix. For example, he said routing information from one destination to another will become a lot harder as Internet technology is introduced to carry phone calls and video along networks designed for data.

On such networks, phone calls and video are broken up into packets of information, and each packet is directed along the fastest available route to its destination. The packets must arrive at nearly the same instant to be reassembled in real time. Close network monitoring becomes even more vital under such precise conditions, Keough said, making Inet products more useful to communications carriers.

"We allow them to identify and fix problems a lot faster," Keough said. "The more complicated things are . . . the more our solution becomes of value to them to make that very diverse technology easier to manage."

Tektronix bought Inet with a nearly equal mix of cash and stock for $495 million, about a 16 percent premium over Inet's market value before the deal was announced. Inet had about $155 million in cash when the transaction closed; in that light, Tektronix's net cost was $340 million.

Tektronix said it eliminated only a few Inet jobs, primarily administrative positions. The rest of Inet's roughly 500 employees will remain in Texas.

Wall Street is typically cool to takeovers. Investors worry that companies overpay for acquisitions and that the challenges of integrating two corporate cultures distract managers from their day-to-day businesses.

Indeed, Tektronix's stock dropped 2.3 percent the day after it announced the Inet deal in June and has fallen another 11 percent since. Analysts, though, say doubts about the broader technology industry, not the Inet acquisition, are dragging down Tek's stock.

"I think that has little to do with Inet, more to do with the industry," said Mark F. FitzGerald, analyst with Bank of America Securities in San Francisco.

FitzGerald, who does not own Tektronix stock, rates Tek a "sell." He said the reason is that the Beaverton company is vulnerable to deterioration from continued decline in the electronics industry. FitzGerald said he thinks Tektronix is operating well and considers Inet "a good fit."

Software companies are a natural complement for many hardware businesses, said Stephen Koffler, an analyst who follows Tektronix for Wachovia Securities in New York. The addition of a software line gives a hardware manufacturer more services to offer customers and access to the software companies' clients, said Koffler, who does not own Tektronix stock.

Software makers also typically enjoy higher profits margins and more recurring revenues than hardware companies, he said. For those reasons, Koffler said he considers the Inet purchase "a good strategic move."

Tektronix hasn't given precise forecasts of what Inet will mean to its bottom line. Chief Financial Officer Colin Slade said Tek expects the cost of the acquisition could slightly reduce earnings per share in the current fiscal year, but boost them after that.

As for Tek's overall prospects, opinions vary widely. Analysts have set 12-month price targets for the company's stock ranging from $28 a share to $44. Tek shares closed Wednesday at $30.26.

The wide range of targets results from divergent opinions about the outlook for the technology industry and Tektronix's exposure to another slowdown in the semiconductor industry. Another slump could hurt Tektronix if tech-company customers slow investment in research and development. Tektronix's most recent forecast, however, projects sales in the current quarter will be at least 7.8 percent higher than in the same period last year.

Technology slowdowns can be abrupt, Slade said, but historical patterns suggest the tech recovery that got under way a little more than a year ago won't end immediately.

"We would be pretty surprised to see a downturn as soon as now," Slade said.

-----

To see more of The Oregonian, or to subscribe the newspaper, go to http://www.oregonian.com.

(c) 2004, The Oregonian, Portland, Ore. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

TEK, INTI, T, BTY, DT, DTE,

More News in this Category