Tustin-Based Internet Firm PairGain Sold
PairGain Technologies Inc., a pioneer in high-speed Internet communications and one of Orange County’s major public companies, will be bought by a Minneapolis rival for $1.6 billion in stock.
The purchase by ADC Telecommunications Inc., announced Wednesday, is expected to trigger a round of mergers among digital network-equipment makers. Consolidation in this booming but fragmented field could lead to an industry standard, thus simplifying and expanding consumers’ use of devices giving them lightning-fast Internet access.
In Tustin-based PairGain, ADC is picking up a company rebounding from years of strife, including a costly relationship with infamous financial advisor Jay Goldinger and an Internet hoax last year that triggered a national criminal investigation.
Analysts said PairGain, founded 12 years ago, had the technology but lacked the size and financial muscle to compete effectively on its own. ADC, with sales of $2 billion last year--almost nine times PairGain’s--said that the merger would result in the layoff of about 100 of PairGain’s 800 workers. Roughly 650 of PairGain’s employees are based at the company’s headquarters in Tustin.
Both companies make equipment that is used to provide so-called digital-subscriber line, or DSL, service. DSL technology offers computer users Internet access that is always on and with cruising speeds up to 140 times faster than that offered by 56K modems sold today with personal computers.
Rolling out the service has been long-delayed, but telephone and cable companies are pushing hard to provide DSL connections as the public demands faster access to the Internet. Experts predict that DSL lines to homes and businesses will surge to about 14 million in 2004, from just 300,000 last year.
That growth prospect was a primary factor in the acquisition by ADC, which makes an array of networking devices for telephone companies. PairGain, long rumored to be on the selling block, said Wednesday that it had approached ADC as a possible suitor several months ago.
Though the PairGain corporate name will disappear, the company’s operations will remain in Tustin, and several top PairGain officials will take on senior roles at ADC, said PairGain Chief Executive Michael Pascoe.
Under the agreement, ADC will swap 0.43 of a share of its stock for each PairGain share. The companies priced the $1.6-billion deal based on Tuesday’s closing stock prices, which meant ADC would pay $20.13 a share for each PairGain share. That was a 25% premium above PairGain’s closing price of $16.06 on Tuesday.
“We had felt for some time that the technology and size of our company would really pay off,” said Pascoe, who was brought in by PairGain’s board in 1998 to shore up its losses and help restructure the company.
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But investor reaction Wednesday was not so favorable. In a day of strong gains for high-tech stocks, Wall Street knocked off $2.81 in ADC’s shares, to $44, while bumping up PairGain’s stock by $1.44, to $17.50 amid heavy trading.
Nonetheless, analysts praised the deal as a smart move for both companies.
ADC’s expertise in distribution, sales and administrative support would give PairGain’s products greater market penetration than the Tustin company could hope for on its own, they said. “This company has been struggling for a long time and should benefit from being part of a larger organization,” said Tim Savageaux, an analyst with WR Hambrecht & Co.
PairGain has experienced several odd jolts in the last five years, mixed in with more routine financial disappointments.
In the mid-1990s, PairGain lost as much as $28 million that it had invested with Goldinger, the former Beverly Hills financial advisor who had developed a national following with his bond-trading skills. Federal prosecutors accused PairGain of not disclosing the investment losses properly and filed criminal charges against PairGain. The company pleaded guilty to a record-keeping charge and agreed to pay a $1.4-million fine.
Last spring, PairGain found itself the victim of a crime when one of its employees, Gary Dale Hoke of Raleigh, N.C., posted a bogus news report that the company was being bought for $1.35 billion. That caused a 30% run-up in its stock price. Hoke was arrested and charged with fraud.
Today, PairGain’s stock price is less than half the highflying levels it reached in late 1996. Faced with increasing competition late in 1998, PairGain posted five consecutive quarters of declining profits and revenue.
PairGain, however, was still attractive despite its troubles, ADC Chief Executive William Cadogan said. With the Tustin company, ADC can knock out a prime rival and expand its own engineering and development team at the same time, he said.
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Even more tantalizing is PairGain’s Avidia System, which creates an electronic “path” for high-speed data and Internet traffic.
Widely praised by industry analysts for its design, Avidia will fill a major hole in ADC’s product line just as the market for this service is poised to explode, Cadogan said.
“We’re right at the knee of the curve,” he said.
The telecommunications industry has been promoting DSL and its benefits since the mid-1990s. But technological problems, rising costs in rolling out the service and confusion among consumers over the various types of DSL have caused delays.
But as the public demand for faster Internet access has grown, many providers have eliminated their hefty installation and equipment fees and slashed their monthly service charges to new lows.
DSL’s biggest limitation, however, is that not everyone can get it. The service is available only in places where the phone company has “conditioned” the copper lines to allow data to move at higher speeds.
While the high-speed communications market grows, the industries that feed into it are starting to merge. Semiconductor companies like Intel Corp. and Irvine-based Broadcom Corp. have been gobbling up smaller rivals in an effort to expand their portfolios of technologies.
“It was only a matter of time before you started to see it in the equipment [industry],” said Kimberly Funasaki, a senior analyst for the research firm International Data Corp.
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A Company’s Travails
PairGain Technologies Inc. has had a tumultuous 12-year history from high flying performance to criminal investigations.
At a Glance:
Headquarters: Tustin
Industry: Telecommunication, high-speed data transmission
Founded: 1988
President/CEO: Michael Pascoe
Employees: About 800 worldwide, including 650 in Orange County
Exchange: Nasdaq
Wednesday’s closing stock price: $17.50
Sales (in millions)
‘95: $107.2
‘99: $224.8
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Net Income (in millions)
‘95: $1.1
‘99: $2.4
Graphics reporting by JANICE JONES DODDS/Los Angeles Times
Source: Bloomberg News
Stock Trend
Monthly stock highs and lows:
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Date High Low 1998 1/30 21.44 15.5 2/27 21.50 18.06 3/31 24.38 17.88 4/30 24.13 18.25 5/29 20.00 15.25 6/30 20.13 12.75 7/31 17.50 13.25 8/31 14.25 8.75 9/30 11.69 7.38 10/30 9.44 6.00 11/30 13.63 8.06 12/31 10.25 6.88 1999 1/29 12.00 7.81 2/26 10.94 8.50 3/31 10.31 7.94 4/30 13.81 8.50 5/31 16.13 10.88 6/30 14.38 10.88 7/30 12.25 9.00 8/31 11.56 8.00 9/30 14.13 9.38 10/29 13.69 11.00 11/30 18.56 12.13 12/31 17.25 13.00 2000 1/31 15.38 10.63
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