Smith Micro's M & A Strategy: Patience Paying Off

| About: Smith Micro (SMSI)
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By Thomas Rasmussen

Up until the credit crisis knocked the economy into a recession, mobile software company Smith Micro Software (NASDAQ:SMSI) had been a fairly active acquirer. The Aliso Viejo, California-based firm closed five deals worth $93m in 2007 alone. However, as the economy slid into a tailspin, Smith Micro pretty much stepped out of the market. Last year, it announced only a pair of tuck-in acquisitions, which we estimate cost just $3m total.

We suspect Smith Micro may be looking to return to a quicker M&A pace. Last month, it announced its second-largest deal, picking up Mountain View, California-based Core Mobility for $18.5m. (We understand the two sides discussed a deal back in 2007, but couldn’t get together on price.) Smith Micro will hand over $10m in cash and cover the rest of the Core Mobility purchase in stock, which will hardly limit its ability to do future deals. The debt-free company, with a market cap of $340m, claimed $44m in cash and short-term investments (at least before announcing the Core Mobility purchase). Moreover, it recently filed a shelf offering intended to fatten its treasury toward additional deals. At current prices, the four million-share offering will effectively double Smith Micro’s cash on hand. So where might it be looking to shop?

The Core Mobility acquisition reached into a new market segment. But we believe any significant future deal would see the company aiming to bolster its core mobile enterprise VPN offerings. That is where it shopped before putting the breaks on its M&A program in late 2007, when it picked up PCTEL’s mobility assets and Ecutel Systems. Potential targets include Norwegian Birdstep Technology, Swedish Columbitech, Seattle-based NetMotion Wireless and Canadian vendor ipUnplugged.

Although all four would make excellent tuck-in acquisitions, we view publicly traded Birdstep as a particularly good fit for Smith Micro. The Norwegian company has trailing revenue of about $18m, which would be a not-insignificant boost to Smith Micro’s revenue. But more importantly, acquiring cash-burning Birdstep would provide a much-needed foot in the door to the Nordic/European markets to help Smith Micro expand beyond the Americas, which currently accounts for more than 90% of revenue. Birdstep can likely be had at a discount too, as the company currently sports a market cap of about $30m, a mere one-fifth of its 2007 levels. Patience might be the operative word for Smith Micro’s M&A strategy, and it looks like it’s paying off.

Smith Micro’s historical M&A

Period Number of acquisitions Total deal value
2009 YTD 1 $18.5m
2008 2 $2-3m*
2007 5 $93m

Source: The 451 M&A KnowledgeBase * official 451 Group estimate