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Technology Stocks : DDL Electronics

DDL 2.085

-4.1%

2:41 PM EST

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To: MIKenn who wrote (144)	6/30/1998 11:25:00 AM
From: Chris Nevil	Read Replies (2) of 164

M1Kenn, I don't feel fully qualified to respond to your comments -- and they are certainly thought-provoking ones. But as was very clear in the meeting yesterday, the valuation on the deal was as much rooted in being a marriage of necessity (e.g. avoiding bankruptcy!) as in the intrinsic values of the combination. This was not IMO the normal M&A criteria they stated they will use going forward. The short-term debt load resulting from DDL's acquisition of SMTEK, and the implosion of the Century Electronics and one other merger deal at the "11th hour" made this expensive compromise a practical must. Not that you will find this comforting, but I think it was mentioned at some point that the original deal proposed by Jolt was for a far greater number of shares than 9MM. Again, DDL had very little leverage at that point! The one-time charges have to do with the legal and accounting morass during the labyrinthine SEC approval of pooling process. On an operating basis (including restatement of previous quarters) it will indeed prove to be accretive according to the company in yesterday's presentation. Your point about the unsustainability of Jolt's excellent margins is well worth pursuing. I hope you will take it up with the company CFO. What makes you feel that IBM, if they are the big client, will find the margins unacceptable? As I understand it Jolt's forte is quick turnaround of low volume specialized items in what must be a labor-intensive process. That doesn't sound like the kind of business that would lend itself to cutthroat competition or unreasonable expectations by the client base. Dependability and quality would seem to be the most important criteria, wouldn't they? As for management being spread out, if anything you may see more of this if the company realizes its stated objectives of acquiring additional operations in a number of states where the better OEM prospects are located. They stated the need to have more regional service available to these manufacturers, providing "small company service mentality" in a company with global capabilities. I think you are possibly being harsh in talking about DDL "learning to operate its business properly". Their gross margins are excellent vis a vis the industry's. Apparently the challenge is developing enough top-line to leverage their G&A costs better. In point of fact this management has restored the company to operating profitability during the last five consecutive quarters after thirty-two quarters of operating losses! I think the stock price during the last year has reflected much more than the "opinion" of investors. It has legitimately reflected their fears about the company's viability should the Jolt deal have fallen out for some reason. That's past us. There were numerous other factors touched on during the meeting yesterday. I'll try to cover some of them a bit later. In the meantime I hope this provides some kind of useful feedback. Chris

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