Sierra Wireless, Aastra Technologies: Opportunistic Canadian Tech Juniors

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Includes: AATSF, ERIC, SWIR, WVCM
by: Nick Waddell

Canadian tech juniors Sierra Wireless (NASDAQ:SWIR) and Aastra Technologies (OTC:AATSF) are two very different companies.

Based in Richmond, BC, Sierra has been around since 1993. The company developed some of the first wireless data devices. Sierra's stock was a dot-com era high flier: it rocketed to over (US) $80 a share in 2000. Predictably, the company fell back to earth when other tech stocks did, in 2002. Despite a brief run to the (US) $45 level in 2004, Sierra Wireless stock recently settled back to the sub (US) $6 level.

Founded in 1983, Concord, Ontario based Aastra, however, has never enjoyed the same success with investors. The company, which makes products and systems for accessing communication networks including the internet, has a recent stock chart that looks like a ski hill. After spending most of the last three years north of (US) $30, the stock recently plunged to under (US) $10. Its shares closed Tuesday at (US) $9.53.

Recently, however, the two companies have had something in common. In the midst of unprecedented market turmoil, with M&A deals being shelved left and right, both Sierra Wireless and Aastra Technologies have utilized strong balance sheets to make strategic acquisitions.

On January 14 of this year, Sierra announced the opening of cash tender offers to acquire France's Wavecom [Paris: AVM] (NASDAQ: WVCM), which designs embedded wireless technology for machine to machine (MSM) communications. Sierra's offer is the U.S. dollar equivalent of (euro) 8.50. The deal works out to about one times sales.

On February 19, 2008 Aastra acquired Ericsson's (NASDAQ: ERIC) lagging enterprise communications business. The total investment by Aastra was approximately (C) $160-million. The business, which has required Aastra to restructure and cut costs, generated revenue of approximately $460-million in its last fiscal year ended December, 2007. The acquisition was tweaked throughout 2008, and ultimately resulted in a one time loss of approximately $10 million that hit the company's books in the third quarter.

Will these aggressive bids to expand their business work out for Sierra Wireless and Aastra Technology work out? Only time will tell, but if these are assets that the respective managements had been coveting, one could certainly argue that these were strategic moves made at an opportune time.

Perhaps a more interesting question about Sierra and Aastra right now is, "What do the respective acquisitions do to the value proposition of each company if the deals don't work out?"

As of Q3 2008, after the Ericsson deal had hit the books, Aastra was still in good shape: The company had (C) $82,352,000 in cash and short term investments with just $35,266,000 in long term debt. As mentioned, Aastra took a hit on the Ericsson acquisition, meaning Q3's profit was a mere $2.6 million or .17 cents per share. Forgive this one time hit and Aastra's numbers look positively rosy: in the Q3 earnings release the company stated that,

Excluding the impact of this acquisition, net earnings would have been approximately $11.3-million or 73 cents in diluted earnings per share due to stable revenue, improved gross margins and strong cost control.

Aastra's top line is now improving rapidly too: sales for the three months ended Sept. 30, 2008, were $224.5-million compared with $141.1-million for the same quarter in 2007.

To say the market disliked the Sierra Wireless acquisition of WaveCom would be an understatement. On November 28th, 2008 the day before the acquisition was announced the stock closed at (C) $10.42. By December 24 the stock was $6.02 -a loss of 42%.

But like Aastra Technologies, Sierra Wireless has a balance sheet that can withstand the risk of even a bad acquisition. On September 30th, the company reported it had over $202 million in cash and short term investments and zero long term debt. If the deal works out the way Sierra management hopes it will, the recent damage inflicted on the stock may have been the ultimate buy opportunity: Sierra Wireless is still trading at approximately one half of one times sales.

With strong cash flows, good operating margins and a healthy aversion to debt, Sierra Wireless and Aastra Technologies were able to strike while they felt the iron was hot on strategic acquisitions. The management of the respective companies certainly feel that way: addressing the WaveCom acquisition on December 2, 2008 Sierra President and CEO Jason Cohenour said,

The agreement reached today between Sierra Wireless and Wavecom is a key strategic milestone for both companies. In joining forces, we are creating a global leader in wireless data.

Sierra Wireless investors hope Mr. Cohenour is right. But with the company set to break an annual revenue record and several consecutive Q's of profitability in a row, the company will live to fight another day - even if he is wrong.

Disclosure: no positions