After DSP Communications Inc. announced plans to merge with Proxim Inc. last Tuesday, DSPC’s stock dropped 49 percent to close at $35.25 on the Nasdaq exchange. But Merrill Lynch calls the merger a “smart, strategic move” for DSPC toward diversifying its product base and geographic areas of distribution.
Proxim’s stock closed at $21.50 Tuesday, a $2.80, or 15 percent gain from a day earlier, and $23.25 Wednesday. DSPC recovered slightly Wednesday to close at $38.25.
The merger is intended to be a tax-free stock exchange-which DSPC values at $400 million-and a pooling of interests for accounting and financial reporting purposes.
“By joining forces, DSPC can aggressively pursue new wireless networking technology opportunities while maintaining its leadership position as a developer of chipsets and wireless personal communications products,” said David C. King, chairman of the board of DSPC.
The Cupertino, Calif., company produces chipsets and other wireless communications equipment.
The stockholders of Proxim, a maker of data networking products, will receive seven-tenths of a share of DSPC common stock for each outstanding share of Proxim stock. Pending shareholder approvals, the deal should be completed in January, said DSPC.
DSPC’s growth has been driven primarily-90 percent to 95 percent-by its chip set sales in Japan’s digital cellular market, said Merrill Lynch. That market “has been doubling on a year-to-year basis over the last several quarters,” which the firm expects to continue a few more quarters, but a “100 percent subscriber growth rate is not sustainable in the long term,” says the firm in an Oct. 30 report.
Merrill Lynch said DSPC needs other products to drive its growth and would benefit to geographically diversify its revenue distribution.
“DSPC’s core competencies are in software development and RF engineering … Instead of applying their skills to design and develop a better base band chipset, DSPC can now apply these same skills to build a better wireless client adapter or access point,” the main components of a wireless data network, added Merrill Lynch.
Proxim of Mountain View, Calif., designs and produces local wireless area data networking products using spread spectrum RF technology. U.S. revenue represents between 65 percent and 75 percent of Proxim’s total revenues, said Merrill Lynch.
Diversifying revenue distribution geographically would help DSPC “minimize effects from political or economic changes in any single region,” added Merrill Lynch.
The investment firm did express that the short-term growth of wireless data networking is currently riskier than Japan’s cellular market, and that DSPC will face marketing and manufacturing challenges in its new business, but concluded DSPC’s risk in merging with Proxim is justified by potential rewards in the data market.
Merrill Lynch continues to recommend the purchase of DSPC common stock with an Accumulate (2) intermediate and long term rating.
DSPC said the combined company is expected to have a market capitalization of around $1.7 billion, based on the number of new shares issued by DSPC and the closing price of the company’s common stock on Oct. 28.
