General Dynamics Buying Wireless Biz

Zacks

General Dynamics Corporation (GD) has entered into a definitive agreement to purchase IPW Holdings, a subsidiary of IPWireless Inc., for an undisclosed amount. The agreement has been approved by the Board of Directors of both companies. However, subject to normal regulatory review, General Dynamics expects the transaction to be completed in the third quarter of 2012.

Based in San Francisco, IPWireless Inc. is engaged in supplying 3G and 4G LTE wireless broadband network equipment and solutions to first-responder and military customers. Post-transaction, IPW Holdings will be renamed General Dynamics Broadband and will operate as a subsidiary of General Dynamics C4 Systems.

The first responders, catering to emergencies, require speedy, consistent and safe access to full-motion video and other high-bandwidth services in order to protect the public and themselves. IPWireless Inc. manufactures wireless-network components, user devices and end-to-end systems that facilitate the first-responders to access lifesaving data and applications at very high speeds. It also makes tools such as real-time fingerprint identification and high-resolution video for mobile users and military customers.

As IPWireless' products are built on commercial networking standards, they improve first responders' effectiveness and safety by providing them with greater access to information.

Besides facilitating first responders, IPWireless' 700 MHz Long Term Evolution products meet the requirements of the nationwide interoperable broadband network that was recently enacted in the Middle Class Tax Relief and Job Creation Act of 2012. This network will provide priority access to services such as mobile field reporting and photo and crime databases to municipal agencies for improved law enforcement and officer safety.

This is not the first time that General Dynamics has acquired a company that provides wireless broadband network equipment. In July last year, the company had purchased Fortress Technologies, Inc. that provides secure wireless networking equipment for the U.S. military and other government customers.

As far as liquidity is concerned, the company seems to be well placed with cash and cash equivalents of $2.6 billion as of March 31, 2012. In the first quarter of 2012, the company clocked pro forma earnings of $1.70 per share, which was above the year-ago figure of $1.64. Earnings also beat the Zacks Consensus Estimate by a penny.

With an improving business jet market, its stable business of U.S. military vehicles, and strong cash flow generation, we expect the company to book profits going forward. However, we are concerned as the company is largely tied to the U.S. defense budget, where the threat of budget cuts is high. Also, we have turned slightly cautious about the risks related to the execution of key projects. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. 

The company mainly competes with Lockheed Martin Corporation (LMT) and Textron Inc. (TXT).

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