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ADC to acquire PairGain
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February 23, 2000: 3:54 p.m. ET
Network equipment company to pay $1.6B in stock for DSL provider
By Staff Writer Michele Masterson
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NEW YORK (CNNfn) - Network equipment provider ADC announced Wednesday that it will pay $1.6 billion for PairGain Technologies Inc., a maker of digital subscriber line systems, in a move that will expand ADC's high-speed Internet access business.
The news sent ADC stock down 3 to 43-13/16 while PairGain gained 1-1/2
to 17-9/16 in late afternoon trading.
Under the agreement, each share of PairGain's (PAIR: Research, Estimates) common stock will be converted into 0.43 share of ADC (ADCT: Research, Estimates) common stock. The deal's value, roughly $1.6 billion, is based on ADC's closing stock price Feb. 22 of $46.81.
The acquisition is not expected to impact ADC earnings per share for 2000 and will add 5 cents to 2001 EPS.
The transaction represents a premium of 25 percent on PairGain, based on Tuesday's closing price of 16-1/16.
WR Hambrecht analyst Tim Savageaux is one of many industry experts who applauded the acquisition.
"I like the deal a lot," Savageaux said. "ADC could actually be paying a lot more for PairGain; it's worth a lot more. It's a very sensible transaction and a bargain."
The PairGain purchase is part of Minnetonka, Minn.-based ADC's strategy to take the lead market position in supplying digital subscriber line (DSL) broadband access systems.
Tustin, Calif.-based PairGain's products are used by service providers and private network operators globally to deploy DSL-based services, such as high-speed Internet, remote LAN access and enterprise LAN extension.
"From a strategic standpoint this makes sense," Savageaux said. "ADC is not only strengthening its DSL equipment business but getting into a new market in delivering DSL, That's the real new market."
According to industry analysts, the DSL market for business and residential customers is poised for growth. The DSLAM market is predicted to increase at an annual rate of 47 percent from 1999 to 2003, according to Yankee Group. Credit Suisse First Boston forecasts that high-speed communications connections for business clients, providing HDSL, T3, frame relay and optical lines, will grow at a yearly rate of more than 30 percent.
Hambrecht analyst Savageaux believes the DSL market will reach the $1 billion mark by the end of this year.
"PairGain has the best next-generation platform but has had trouble bringing it to market, " said Savageaux. "ADC will help that and it's good to see ADC focusing on DSL...that's the core investment value."
Merrill Lynch analyst Michael Ching issued a research note praising the union.
"We believe this acquisition solidifies ADC's position in the high-bit rate market digital subscriber line (HDSL) market. More importantly, we believe ADC is acquiring some technology that will enable the company to participate in the fast-growing xDSL market," Ching said.
The deal, which must be approved by PairGain stockholders and regulatory authorities, is expected to close during ADC's fiscal third quarter, ending July 31. Following the closing, ADC expects to record one-time costs related to the acquisition.
ADC employs 14,400 workers worldwide and has annual sales of $2.1 billion. The company's stock is listed on Standard & Poor's 500 index and on the Nasdaq-100 index.
"It's a very, very good deal for both companies," said Chase Hammbrecht & Quist analyst Michael Neiberg. "The combination makes a nice marriage since PairGain's product line is a perfect fit into some missing holes ADC had." 
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