ADC Telecom Insiders Buying Stock (ADCT)

Jun. 7.06 | About: ADC Telecommunications (ADCT)

Insider Score LogoFrom InsiderScore: Three longtime directors at ADC Telecommunications (ADCT) gave the wireline telecommunication equipment maker's proposed acquisition of wireless telecommunications equipment maker Andrew Corp. (ANDW) an additional endorsement, becoming the first insiders at the company on record to buy stock on the open market. All of the transactions by ADCT insiders took place on June 5th, and here is a rundown of the action:

Non-Executive Chairman Johan Blanchard III bought 15K shares at $17.73, upping his holdings to 39.23K shares. Blanchard, the chairman & CEO of eFunds (EFD) until September 2003, has been a director at ADCT since 1999 and non-executive chairman since 2003. He was formerly a director at Wells Fargo (NYSE:WFC); the president & CEO of Deluxe Corp. (NYSE:DLX), from which EFD was spun-off; and an executive at AT&T (NYSE:T), well before that company's merger with SBC Communications.

Director James Castle purchased 5K shares at $17.80, raising his stake to 22.88K shares. A director since 1994, Castle is the president & CEO of Castle Information Technologies, a provider of information technology and board of directors consulting services. He has had a lengthy career as an executive in the billing services and telecommunications equipment sectors.

Director John Wunsch picked up 1K shares at $17.73, boosting his holdings to about 5K shares. Wunsch is the president of Harris MyCFO, a wealth management services provider. He was named an ADCT director in 1991, at which time he was president of a registered investment advisory firm.

Shares of ADCT have taken a beating over the past week, falling more than -23% since the company announced an agreement to acquire ANDW for about $2B in stock. Under the terms of the deal, ADCT is swapping 0.57 share of its stock for every 1 share of ANDW stock. When the deal was announced before the bell on May 31st, the offer represented a 30% premium for ANDW, a figure that has narrowed considerably as both stocks have now dropped below their closing price from the day prior to the announcement.

ADCT and ANDW executives hailed the deal, saying that they are creating a "global leader in wireline and wireless network infrastructure solutions" with over $3.3B in annual sales. The companies said that Blanchard will continue in his position, and that eight of ADCT's 11 board members would fill seats on the new 12-member board. ADCT's CEO, Robert Switz, will lead the combined company, which will retain the ADCT name.

"Today we are announcing plans for a promising new growth stage for our two great companies. With this strategic combination, we will be a world leader in communications network infrastructure products and services. The strategic, operational and financial synergies of our two strong companies create a significant opportunity to grow value for our customers, shareholders, and employees," said Switz at the time, alluding to, among things, $70M to $80M in estimated annual pre-tax savings the company expects to realize in the third year after closing.

Analysts, mirroring investors, had a mostly bearish bias. Merriman Curhan Ford & Co.'s Tim Savageaux told clients that his firm believes "ADCT is overpaying for a low-quality asset with modest growth prospects," and he quickly downgraded the stock from "buy" to "neutral." Morningstar's John Slack said that while he likes "the rationale for the deal," he was concerned that ADCT was "giving up their momentum by going after ANDW." Boutique research firm Miller Johnson downgraded ADCT from "outperform" to "market perform," cutting its target from $30 to $19, and citing ADCT's guidance, which suggests some weakness over the next two quarters, and the ANDW deal, which the firm says brings ADCT a company with poor margins that has "struggled operationally." At least one other analyst, Tal Liani at Merrill Lynch, downgraded ADCT from "buy" to "neutral."

Meanwhile, PiperJaffray's Mike Walkley came out in favor of the deal and the price, saying that the combination of ANDW's wireless business with ADCT's wireline business should help the combined company "grow faster than the overall market for mobile-networking products in 2006."