Chris:
I find your report troubling.
DDL is acquiring a company with only $2mm in sales. The valuation was as low as $5,625,000 (based on 5/8 stock price x 9,000,000) and as high as $10,687,500 (based on 1-3/16 share price at the time of the deal formation). The valuation was so high because of the acquisition target's EXTREMELY (and IMO UNSUSTAINABLY) high margins. 9mm shares represents 27% of the company!
The acquisition target proves that economies of scale are irrelevant in achieving profitability in this business. Yet, that is the explanation for acquiring the target--a big contradiction.
I believe the target's margins are unsustainable because now that its margins are public information, its major customer (IBM, I think), who represents the lion's share of its business, will ask for price cuts. Furthermore, overhead can only rise if management is spread among California, Florida, and Europe.
The result of this deal is that the stock price fell from as high as 1-3/4 to as low as 9/16. This devaluation represents the opinions of investors. If the company uses the additional authorized shares before it learns how to operate its business properly, then the shares will again be devalued. The $100mm target is foolhardy and the company should instead focus on profitability.
One-time charges contradict all statements thus far that the deal was immediately accretive.
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