Are there investment opportunities to be found in the aftermath of mergers or acquisitions?
Consider the case of LogEtronics Inc., a Springfield, Va., firm that employed 386 people when it was acquired about a year ago by DBA Systems Inc. of Melbourne, Fla.
DBA Systems, a 21-year-old company that's deep into classified Defense Department work, develops and manufactures computerized image processing systems used in missile tracking and other exotic aspects of modern warfare.
In its 1982 and 1983 fiscal years, 95 percent of DBA's gross revenue came from government contracts. DBA revenue grew steadily from $13.5 million in 1981 to $28.4 million in 1983.
LogEtronics, commonly called "Log E," is a 30-year-old operation that manufactures and distributes photographic and computer imaging technology products used in the graphic arts industry and in aerial photography.
Between 1979 and 1983, sales were mostly static, in the range of $30 million to $34 million. In 1982, the company began to lose heavily after Log E acquired four firms in one year. Log E's losses were $2.6 million in 1982 and $2.2 million in 1983.
DBA had several reasons for wanting to acquire Log E. Importantly, DBA wanted to expand its horizons beyond defense work. "We wanted to use our imaging technology in the commercial marketplace," said DBA Chairman Howard N. Hebert. There were other reasons, too. It was easier to buy a company than to start one from scratch, and Log E seemed to be a good match.
And so they were wed -- but not without considerable trauma on the part of the old Log E management and staff and some Log E stockholders.
Belt-tightening became the order of the day. After the acquisition was announced in October 1983, DBA dropped Log E president William K. Marrinan and promoted Gerald A. Nathe to the top spot. Nathe had been Log E's chief operating officer. In the acquisition process, other top company officers were let go, and the staff was trimmed by 20 to 25 percent. DBA closed some offices, moved people around and generally trimmed expenses. DBA now has a total of about 900 employes.
Log E stockholders shared the trauma. The acquisition deal provided that for every 100 shares owned by a Log E stockholder, he would get almost 70 shares of DBA stock. But DBA put some of the stock in an escrow fund pending closer study of Log E finances, and stockholders got only 60 DBA shares for each 100 shares of Log E stock. Shareholders have been told they won't get any more.
The week before the news of the acquisition broke in October 1983, Log E stock was selling for about $12 a share, but it quickly dropped to $9. The price stayed in the $8 to $9 range for the next several months. By the time the acquisition was approved in April 1984, Log E stock was selling in the area of $6.
Meanwhile, DBA stock, which had been selling for about $18 to $19, dropped off to $16 with news of the acquisition, and slowly slid to about $10 to $11 by the time the deal was done. It has since moved back up to the $14 to $15 area. It closed Friday at $15.25.
What it all meant was that a Log E stockholder got hit twice, once by the reduced number of DBA shares finally exchanged for Log E shares, and secondly by the drop in the DBA stock price.
That drop was caused initially by the apparent unhappiness of the stock market with the acquisition announcement, but it was sustained by the long-term downtrend in high-tech stocks. DBA's original stockholders also got hit by the falloff in the DBA stock price.
At what point a Log E stockholder, now sitting with his DBA shares, will pull even will depend on when he bought his Log E stock and what he paid for it. But for many stockholders who bought Log E stock at between $15 and $22 a share, getting back their investment will take a while.
On the other hand, DBA officials could argue that the way things were going at the Springfield company, Log E shareholders were fortunate to get what they did out of the stock.
It is now a year later, and DBA executives are optimistic about the future. Log E President Nathe says the firm has improved its gross margins, become more competitive and controlled expenses. As a result, the Log E operation, he said, is now "significantly profitable," although he won't say how much of the DBA's estimated earnings of 95 cents a share in 1985 will be attributable to Log E operations.
DBA's business is now 50 percent commercial, 50 percent government, and Log E is introducing new products.
Log E employes, Nathe acknowledges, went through a period of tension. "Anytime a company is losing its independence," he said, "people are going to be wondering what is happening to them and their livelihoods." It takes a lot of "walking around" by executives to stay in touch with employes and keep morale up, he said.
Although some of the analysts who follow DBA say they think that there are limitations on the amount of business to be obtained in defense-related imaging, Hebert said that DBA's backlog continues to grow. "We're probably the best play in pure imaging," he said. "Seventy-five percent of our work is for a fixed price. . . . Two-thirds is 'sole source.' " -- meaning it is noncompetitive.
DBA, Hebert added, has developed a three-year performance plan for the company. "Earnings are the bottom line," he said.
Analyst Bruce Lupatkin of Hambrecht & Quist, San Francisco, who rates DBA stock a "long-term buy," is forecasting earnings of 95 cents a share on $70 million in sales for fiscal 1985 and $1.25 a share on $85 million in revenue for fiscal 1986. DBA earned 80 cents on $38 million in sales in 1984, but that was prior to the acquisition.
Analyst Mark Dunkel, of Robinson Humphrey/American Express in Atlanta, expects the firm to earn 92 cents a share in fiscal 1985 and $1.16 to $1.20 a share in 1986. Dunkel rates the stock a "hold" in the short term, a "buy" in the long term.
For the people at Log E, there seems to be life after merger and perhaps even profits, too. For the folks at DBA, it may be some time before they know for sure whether the acquisition of Log E was the right move at the right time.
The T. Rowe Price Realty Income Fund, which was considered something of an experiment when it opened in mid-December, closed last week after attracting $90 million from investors. Of the 18,450 accounts that were opened, two-thirds were Individual Retirement Accounts. The IRAs, including rollovers, represented $30 million of the $90 million. "It's a great marketing success," declared Steven E. Norwitz, a vice president of T. Rowe Price in Baltimore. "Now we'll have to make it an investment success, too."
Airline analyst Mark E. Daugherty of Dean Witter Reynolds foresees smaller yields on Piedmont Aviation stock as the airline tries to fight off competition from People Express, which is focusing its route expansion efforts on Piedmont markets, including routes linking Newark to the Carolinas. Daugherty rates the stock a "hold," and has lowered his earnings estimates from $4 to $3.50 for 1985 and from $4.60 to $4 for 1986. He says he anticipates that "a year from now People Express will be unsuccessful in its Carolinas expansion and will either raise prices or withdraw from some markets that are competitive with Piedmont."