Bridgewater to be acquired for $211M

Published on the Ottawa Business Journal website.
June 17, 2011

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Ed Ogonek of Bridgewater Systems.
Bridgewater Systems’ Ed Ogonek.
Photo by ETIENNE RANGER for the
Ottawa Business Journal.

Broadband control system supplier Bridgewater Systems (TSX:BWC) said Friday it has reached a friendly takeover agreement with Amdocs Ltd. (NYSE:DOX) worth $211 million.

The company noted that the transaction is worth $8.20 per share in cash, which is a 30-per-cent premium over its closing price of $6.33 on Thursday, although shares of the company opened considerably higher on the Toronto Stock Exchange following the pre-market announcement, at $8.15.

The transaction still requires approval from Bridgewater shareholders and regulators, but is expected to close by mid-September.

“Becoming part of Amdocs would enable us to accelerate our corporate growth strategy, centred around global expansion,” said president and CEO Ed Ogonek in a release.

He also noted that the transaction would enable “the transformation to next-generation converged networks, portfolio and solution innovation, and leveraging our installed base.”

David Sharpley, Bridgewater’s senior vice-president of marketing, said Bridgewater would remain an “independent stand-alone business unit within Amdocs.”

While he said there could be some “overlap” in administrative functions following the acquisition, Bridgewater expects its local head count will continue to grow overall, including new additions in the engineering department.

The company currently employs about 240 people at its Ottawa headquarters, with total global staff numbers of about 300.

“An acquisition like this means buying products and (acquiring) the people – they are an absolutely fundamental part of the asset, and without that it’s difficult to deploy and evolve the software,” said Mr. Sharpley. “Our plan will continue unabated.”

The agreement has the support of Bridgewater’s board, which holds about 24.8 per cent of the company’s stock.

The firm noted in its release that its board had unanimously agreed that the arrangement is in the best interest of the company and its shareholders, and that it would be recommending that stakeholders vote in favour of the deal.

“This transaction … provides shareholders with immediate liquidity and fair value for their shares,” said Bridgewater chairman and tech magnate Terry Matthews in a statement. “Furthermore, joining a large, international market leader in Amdocs would create new growth opportunities for Bridgewater for the benefit of its customers and employees.”

In an interview with OBJ, Mr. Ogonek noted that acquisition would allow Bridgewater to grow at a much faster pace than the company would have been able to achieve on its own.

“It’s an opportunity to very rapidly scale the business … and go aggressively into the broader software market, which we expect to grow to $1.5 billion within the next three to four years,” said Mr. Ogonek.

He said the deal began taking shape after the two companies got together six or seven months ago to discuss the possibility of a partnership. As they considered the “broader strategic value” beyond simply partnering together, the transaction quickly came together.

“It’s about getting much bigger, much faster,” said Mr. Ogonek.

For shareholders, the purchase price Amdocs is offering represents a strong return on investment, as it’s ahead of the 12-month target for all current analysts and the consensus. However, it presents “a bit of a quandary” for investors who had been anticipating a catalyst that would increase Bridgewater’s outlook, said Ron Shuttleworth of M Partners.

Mr. Shuttleworth, who does hold some Bridgewater stock, pointed out that the company’s stock was trading above $10 only about a half-year ago, and that it could have held on as an independent for quite a while given its strong balance sheet, positive cash flow and the presence of Verizon as a customer.

“It could have continued to be successful, but then again, technology companies do have inherent risks associated with them, with one being the speed of innovation – it’s possible that a year from now (Bridgewater’s) technology could have been surpassed,” he said.

Growth through acquisition had always been a possibility, but Bridgewater’s Mr. Sharpley noted the company had found it challenging to identify targets that fit all its criteria and made financial sense.

“We continually looked at acquisitions that could improve our product portfolio and give us customers, and we had a team continuing to do that up until recently. But on the other side we had someone saying, ‘Listen, you have key assets that are of strategic value and importance to us,’ … it was a good strategic combination,” said Mr. Sharpley.

Mr. Shuttleworth noted that difficulty was something he had observed for companies like Bridgewater that have a small to mid-market capitalization of between $100 million and $500 million.

“Those companies are chronically undervalued from a share perspective on a multiples basis, and the companies they want to acquire … have a higher multiple than the acquirer, so it’s difficult from a financial perspective to justify that type of acquisition,” said Mr. Shuttleworth. “They’re in a hold relative to some of those companies they would like to acquire that are ironically not nearly as far along or as stable, but are valued at a higher rate.”

Meanwhile, the deal is a good fit for Missouri-based Amdocs, which is focused on the customer and service management aspect of the telecommunications market, including processes such as billing and network stability.

Mr. Shuttleworth said Amdocs needed something like Bridgewater, with its specializations in fourth-generation networks and managing smartphone data usage, to round out and modernize its offering.

The Missouri-based firm has focused more on the customer and service management field, with processes such as billing.

“Bridgewater also brings Verizon (as a customer) and more importantly, helps Amdocs stay relevant and protect its large market share,” he added.

The acquisition, Mr. Sharpley added, represents a “validation” of the work done by Bridgewater’s local team.

“We have a large multibillion-dollar company recognizing the innovation, expertise and excellence that our company has built,” he said. “As part of a larger software-oriented company, we can now continue to grow and further innovate.”

And at least in the short term, Bridgewater will continue to look much as it does today – Mr. Ogonek said he has signed a two-year commitment to lead Amdocs’s new local division, along with several other members of the Ottawa-based core executive team.

“The broad employee base here will be the heart and soul of the new business unit, and I expect we will explore and look at new areas to expand, some in Ottawa and some in other geographies,” he noted.

Shares of Bridgewater were up $1.77, or 27.96 per cent, to $8.10 at 3:43 p.m.

Bridgewater’s stock has remained at around the $6 mark since taking a dive May 13, following a sharp downgrade to its fiscal 2011 outlook. Revenues fell 22 per cent to $19.1 million in its first quarter, and per-share earnings dropped to three cents from 18 cents a year earlier, far below analyst expectations of nine cents per share on revenues of $20.8 million.

It also said full-year revenues would be around $77 million to $87 million, with income of $5.5 million to $9.5 million, down from an earlier sales forecast of $88 million to $100 million and profit outlook of $10.5 million to $14 million.

With files from the Canadian Press

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