Industry Voices—Raynovich: Comm Tech M&A in 2018—The year of the bad deal?

It's a turbulent year for M&A across the telecommunications industry. (Pixabay)

With a tech market crash punctuating the year, 2018 will probably be remembered as a year of bad tech deals. CEOs and boards involved in some of 2018's stinker deals may be looking to 2019, hoping a miracle can save their careers. 

Who likes to buy a stock at a high price, only to see it plummet into the abyss? That's got to be the feeling of some CEOs and boards in 2018 as major deals were announced just before a plethora of issues came to the fore: An accelerating trade crisis between the U.S. and China, fears of a global economic slowdown and a technology market crash. 

RELATED: Raynovich: Inside IBM's desperation Red Hat move

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The first deal that leaps out at everybody for 2018 was of course IBM's purchase of Red Hat, which was panned by this scribe who believes it may go down as one of the most colossal tech M&A blunders in history. IBM paid an enormous market premium of 60%, running the price up to $35 billion, for Red Hat just prior to a massive 20% crash in tech stocks. Did IBM CEO Ginni Rometty just top tick the technology bull market? Looks that way to me. 

The primary reason I don't like IBM's deal is that IBM has a terrible track record for integrating large acquisitions. The second reason is that IBM isn't a leader in the cloud and that is a bad place for Red Hat. The third reason I don't like the deal is that it's IBM. 

Moving on. Optics is still an exciting technology space, despite volatility in the market. Whether its 3D sensing technology for smartphones and IoT devices or more efficient transceivers to move bits at higher speeds, optical components will continue to be a key enabling technology for the cloud. 

One of the more eye-catching deals in the space was Saxonberg, Pennsylvania-based optoelectronics company II-VI Inc.'s purchase of Finisar Corporation for $3.2 billion. This was a straight consolidation play looking to roll up strength in the optics markets. Both companies are big suppliers of 3D sensing technology to Apple and others, competing with Lumentum. 

But guess what? II-VI has lost 30% of its value since the deal. And Apple shares have been creamed on fears of weakening demand for iPhones. And a recurring theme enters this backdrop: The trade war with China, which is casting a pall over the entire communications components supply chain. Was this deal another top ticker? Not looking like a genius move at this point. 

On to the cable world—where the same themes come to mind. 

CommScope, a maker of cable and wireless gear, announced a $7.4 billion deal for cable technology player Arris in September. When the deal was announced, Arris stock popped and CommScope shares dropped. Keep in mind that this comes after years of drama and speculation about who would buy Arris, whose stock was stuck in the mud despite holding good assets. 

To say the deal has not played out well would be like saying the film "The Postman" did not win many awards. Lots of shareholders hate it, and they're fighting it in court. CommScope shares have been chopped in half since the deal was announced.

Again, you probably couldn't make up a worse environment for this deal: Immediately after announcing the deal, tech stocks entered a vicious selling spree and the trade war with China degraded, with both Arris and CommScope announcing they would be taking hits on earnings based on increased supplier costs and import tariffs. CommScope is now looking at the possibility of selling off Arris' set-top box business to raise cash and de-lever, while more shareholders pick up their pitchforks.

Funny, after researching and writing this column, it didn't exactly put me into a mood of holiday cheer. Looking at the Nasdaq won't do that either. Perhaps there will be some alleviation of the pressure in the new year, but there's no doubt that large-scale macroeconomic issues such as weakening markets and stress about global trade and tariffs will continue to weigh on the communications sector, which is highly dependent on affordable components from Asia. 

R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.