Acquisitions and Mergers: A Staple of Satellite Industry Life [section on Loral Orion]
satellitetoday.com
Monday, Feb 8
by James Careless
Big fish being eaten by bigger fish, and then being eaten by even bigger fish
themselves: that's the image that best describes the satellite industry's
penchant for acquisitions and mergers.
Currently, it is the "merger" between Gilat Satellite Networks [GICOF]
and GE Capital Spacenet Services [GE] that most people are talking
about. The new company-to be called "Spacenet Inc."-should be large
enough to give Hughes Networks Systems [GMH] (HNS) some serious
competition for the growing VSAT (very small aperture terminal) market.
But, as impressive as this deal is, it's only one of many that have happened
in the last 10 years, said Roger Rusch, president of the management
consulting firm (Telastra) Inc. "For instance, RCA was picked up by
General Electric, and then in the early '90s Martin Marietta acquired GE's
space assets," he recalled. "Then Lockheed merged with Martin Marietta
to form Lockheed Martin; it's now acquiring Comsat Corp."
Lockheed Martin [LMT] is just one acquisition story.
In recent years, GTE sold its Spacenet business to GE Americom to form
GE Capital Spacenet Services, better known as GE Spacenet. Meanwhile,
AT&T [T] acquired Tridom, and the merged AT&T Tridom was then sold
to GE Spacenet, which, of course, is now merging with Gilat.
But that's not all: last year Loral Space and Communications [LOR]
acquired Orion Network Systems, forming a new company called Loral
Orion. Loral also-in partnership with Mexico's Telefonica Autry-acquired
a 75 percent stake in Satelites Mexicanos S.A. de C.V. (Satmex), which
currently operates three satellites in Mexico, and has just launched a fourth,
called Satmex 5. Beyond this, Loral bought Skynet-which distributes video
by satellite-from AT&T in 1997 as well.
Wait, there's more: L-3 Communications has bought Microdyne Corp.
[MCDY], which manufactures aerospace telemetry receivers, and satellite
modem manufacturer Radyne [RDYN] has purchased rival Comstream.
Meanwhile, Maxwell Technologies is taking over Space Electronics Inc.,
which makes specially protected computer chips for satellites and other
spacecraft. And Stratos Global Communications -- a Canadian upstart
focused on the mobile satellite communications market-has acquired
Novanet Communications and Marinesat Communications, plus Teleglobe
Canada's Inmarsat business and status as Inmarsat signatory.
A One-Stop Shop
The merged companies of Gilat and GE Spacenet want to mimic HNS'
one-stop shopping success. In fact, they hope the deal will help them
surpass it.
That's because the new Spacenet "will have superior reach, distribution
and product position, which will allow it to compete successfully in any
part of the world," explained GE Americom Chairman and CEO John
Connelly.
Added Gilat Chairman and CEO Yoel Gat, "The merger of Spacenet into
Gilat will create a vertically integrated, globally competitive firm focused
purely on VSATs. These strengths should help us realize our goal of
becoming the world's leading VSAT company."
To their credit, both companies have long realized that offering both
service and equipment was the golden road to success. That's why Gilat
and what was then GTE-owned Spacenet started working together in the
late '80s, jointly developing what eventually became Spacenet's "Skystar
Advantage" VSAT service.
When GE bought Spacenet from GTE, the two tried to form a closer
relationship, even going so far as to share management for a time. "For
instance, my first boss under GE was Joshua Levenberg, who was the vice
president of marketing here at Spacenet," said Dianne VanBeber, the
current vice president of marketing at GE Capital Spacenet Services, "and
he was also an officer in Gilat."
However, the "sharing arrangement" didn't work out, and so the two
companies separated their management systems. For a while, GE
Spacenet tried to create its own VSAT product called Turbosat.
Observed Dennis Conti, vice president of North American sales and
marketing for Hughes Network Systems, "That was, I believe, a
recognition by a service provider that-as competitive as the market is-they
needed to have their own in-house manufacturing capability."
Ironically, once GE Spacenet and Gilat went their own separate ways and
worked on their own VSAT projects, it became clear "there was more
value in bringing the companies together than to try and really go
full-fledged as competitors against each other," VanBeber said. This, more
than anything, spurred them to resolve the situation through a formal
merger.
Under the "merger" -- which actually sees GE Americom turn over GE
Spacenet for a 30 percent stake in Gilat -- "Gilat is the acquiring entity,"
she said. Still, the size of GE Americom's stake makes it Gilat's largest
single shareholder, and big enough to hold two of the seven seats on Gilat's
board of directors. Clearly, this will allow GE Americom to protect its
interests, while giving Gilat's management the power to run the new
Spacenet Inc.
Gilat also bought Skydata, a Florida-based VSAT company, in December
1996. It also has a minority stake in Global Village Telecom, which
operates rural telephone networks over VSAT, and Ksat, a joint venture
with Keppel Communications of Singapore, which wants to bring
satellite-based telecom services to the People's Republic of China.
Lots And Lots Of Synergy
Loral Space and Communications is another company that believes in the
power of acquisitions and mergers. But why did Loral buy Orion, an
upstart satellite company that challenged Intelsat with the launch of Orion
1?
The one-word answer to this question is "synergy," said Bernard Schwartz,
Loral's chairman and CEO. When it comes to Orion, "they are in the
leasing of satellites-in-orbit capacity, and secondly, they're in the data
(market) through a network of VSATs around the world. Both of those
are targeted businesses for us, so they enhanced our capacity in both of
those areas."
But that's not all Loral liked about the deal, Schwartz said. Orion also has
a viable strategy for interfacing satellites to the Internet-an area that is
widely expected to boom as Internet protocol (IP) applications proliferate
worldwide.
Finally, the fact that Orion already links the United States and Europe by
satellite, and will soon span the Pacific Ocean as well, made the company
an irresistible acquisition. After all, once Orion 2 and 3 are on station in
June 1999, Loral Orion will be able to reach 85 percent of the world's
population.
As for Lockheed Martin's acquisition of Comsat [CQ], the company's
reason for making the deal is "to unite two advanced-technology
companies with complementary capabilities in the commercial space-based
telecommunications industry," said Charles Manor, Lockheed Martin
Global Telecommunications' vice president of news and information. "We
believe it will create a dynamic new global competitor. Just as importantly,
we are committed to achieving timely, pro-competitive privatization of
Intelsat and Inmarsat.
"Lockheed Martin has a long and impressive history in satellites, launch
vehicles, launch services and ground space systems," Manor added.
"Telecommunications services were the missing piece and we created a
new company to concentrate and extend our role in this fast-growing
business area, which we expect to grow on the order of 30 percent
annually."
Marc Crossman, vice president of CIBC Oppenheimer in New York, has
a simpler explanation for Lockheed Martin's actions. "That's a company
that's always been acquisition-hungry," he said -- an opinion bolstered by
all the purchases Lockheed Martin has made over the years.
An Appetite For Acquisition
And then there's Stratos Global Corp., a company for whom acquisitions
and mergers are the very stuff of life. That's because Stratos started life as
Neweast Wireless Telecom, a Newfoundland-based company that
supplied two-way radios to trawlers and oil rigs.
However, Newfoundland's relentlessly depressed economy led Neweast
CEO Derrick Rowe to move his headquarters to Toronto, change its name
to Stratos, and start bulking up through acquisitions in the mobile satellite
communications sector.
The reasoning behind the move was, "The mobile satellite industry-and
particularly the service provider part of it-needed to be consolidated," said
Rowe. "It needed to create someone with some mass that could implement
the systems and the infrastructure to cost-effectively deliver mobile satellite
systems. And that is indeed what we've started to do."
Specifically, Stratos started by acquiring IDB Mobile from Worldcomm
and Teleglobe. It subsequently purchased MCN, a distribution arm of
American Mobile Satellite Communications (AMSC), and then acquired
the maritime business unit itself from AMSC. "We then bought out the
ownership of Teleglobe and became the Canadian signatory" to Inmarsat,
said Rowe, and "announced the purchase of Novanet out of Denver, which
is a SCADA (supervisory control and data acquisition) VSAT company."
Through all of these acquisitions, Stratos has quickly established itself as a
multi-network satellite service provider, offering mobile communications
for everyone from the Coast Guard to cruise ships. Recently Stratos won a
contract from the U.S. Navy to provide Inmarsat B high-speed data-lease
channel-mode communications services for data, voice and fax traffic.
For Derrick Rowe, consolidation of the mobile satellite communications
business is virtually a Holy Crusade, and one that "needs to be done within
the next 18-24 months," he said. The reason? Although the current group
of small mobile companies can cope with current demand, Rowe believes
they won't be able to keep up as usage increases. "We feel that market will
expand rapidly, and none of them have the infrastructure to successfully
handle that type of growth and that type of service delivery," he said. By
growing fast, Stratos hopes to dodge this bullet.
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