Deals give Brightpoint world lead in wireless logistics: Cell phone distributor begins integration of former European rival

August 13, 2007

For wireless phone distributor Brightpoint Inc., CellStar was the appetizer. Dangaard was the main course.

The next nine months will be all about avoiding indigestion.

Brightpoint CEO Bob Laikin is ready. He's been preparing for the meal for more than a decade.

"In the mid-'90s, it was 'shoot, shoot, shoot and then aim,'" Laikin said. "Now it's 'aim, aim shoot.'"

On March 30, Plainfield-based Brightpoint completed its acquisition of the U.S. and Latin American operations of Texasbased rival CellStar Corp. for $62.4 million.

Then, on July 31, Brightpoint closed its purchase of Denmark-based Dangaard Telecom A/S, its largest European rival. In the deal, Brightpoint provided 30 million shares of stock worth $385 million and took on $350 million in Dangaard debt.

Combined, Brightpoint and Dangaard had 2006 revenue of $4.6 billion. With 3,700 employees and 25,000 customers in 25 countries, they handled 64 million wireless devices last year-or nearly one in 10 throughout the world.

Brightpoint also gets to enjoy the services of Dangaard's top management, who are staying on. Dangaard's former CEO, Steen F. Pedersen, is now president of Brightpoint Europe. Michael Koehn Milland, Dangaard's former chief operating officer, is now Brightpoint's co-chief operating officer and president of its international division. Three of Brightpoint's eight board members are stepping down to make room for Dangaard directors.

"You don't get a lot of opportunities in business to grow by combining with a great international company," Laikin said. "One of the most exciting things is getting senior leadership and management from Dangaard. That takes pressure off me and senior Brightpoint executives that had been strained too thin."

Analysts are bullish on the merger, which makes Brightpoint the clear market leader in the wireless device distribution and logistics industry. In a typically glowing report issued July 24, Credit Suisse analysts Michael Ounjian and Karen Holthouse set an $18 price target for Brightpoint's stock. Shares currently trade at $12.28.

"While the global market remains fragmented, we believe this transaction creates the largest handset distributor globally with 9 percent estimated share of global handset units handled by (next year) versus 5 percent for Brightpoint in 2006," they wrote.

Piper Jaffray research analysts T. Michael Walkley and Michael A. Sklansky also are bullish on Brightpoint, and have a $16 price target. But in a May 31 research report, they pointed to the chief risk: unexpected difficulties integrating the two companies.

"While the ... acquisition of Dangaard presents an opportunity for increased global scale and potential purchasing synergies, we believe this large acquisition creates execution risk," they wrote.

"Further, our channel checks continue to indicate market share losses for Sprint, a leading Brightpoint customer, and Motorola, a leading Brightpoint supplier. Finally, the handset market may grow slower than our estimates. All these risks could lead to results for Brightpoint below our estimates."

Brightpoint's financials already have received a lift from the CellStar deal. On Aug. 8, the company reported that second-quarter revenue rose 55 percent, to $851 million. Profit rose 115 percent, to $17.7 million. The profit gain stemmed partly from a one-time tax benefit.

For the next six to nine months, Brightpoint expects to plow through merger-related issues. Laikin said he and his team spent a great deal of time on evaluation and pre-integration work before approving the deal. Laikin recalled that in the mid-'90s, when Brightpoint first attempted to penetrate Europe, it focused primarily on the financial side of the opportunity. But lessons learned then taught Brightpoint to also consider the softer side of an acquisition, such as whether corporate cultures are compatible.

"We got very gun-shy for several years. We were afraid of our own shadow," he said. "This time, we focused on getting to know the people."

But up close, the gulf between American and European business cultures can be much wider than it might appear, warned investment banker Joe Broecker, managing director of locally based Periculum Capital Corp.

European laws restrict a company's ability to restructure its work force through layoffs. And even when two businesses are selling the same products, there can be significant philosophical differences. And that can affect business choices at every level.

Dangaard had been owned by an investment firm. Broeker said its employees might be in for a bit of a shock as they adjust to the reporting standards of a U.S. public company. That means they'll have to focus much more on short-term results from quarter to quarter.

And then there are the inevitable turf battles that stem from human nature.

"If it's a nonpublic company in Europe being acquired by a U.S. public company, you've got a different sense of urgency than in a European environment. That's challenge No. 1," he said. "My gut feeling is just getting people to work together at the more middle-management level on a day-to-day basis, and doing it consistently, can be a challenge.

"What appears to be simple and obvious and natural in cross-border or global relationships just ain't that simple," Broecker added. "We're going to find out how good these guys really are."
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