Smith Micro's Macro Merger

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When a company announces that it will fork over a pile of cash to go through the pain of acquiring and integrating another company, shareholders often react warily. This was definitely not the case with Smith Micro Software (Nasdaq: SMSI) when it said it will spend $59.7 million to take over the mobile-solutions division of PCTEL (Nasdaq: PCTI).

In fact, upon hearing the news, investors bid shares of wireless software developer Smith Micro up more than 20%, and the stock ended the day up 12%. Stock in PCTEL, meanwhile, dipped only slightly, to end the day down 1%.

The enthusiastic reception was a result of not only envisioned product synergies between the two, but also PCTEL's coveted customer list. Before the transaction, Smith Micro was earning nearly three-quarters of its revenue from Verizon Wireless, a joint venture between Verizon Communications (NYSE: VZ) and Vodafone. Now, with the addition of PCTEL customers such as AT&T (NYSE: T), Sprint Nextel (NYSE: S) and Deutsche Telekom's T-Mobile, Smith Micro may finally be able to diversify its revenue base.

What's more, since PCTEL was Smith Micro's main competitor for mobile-software solutions, combining the two groups gives the new company a clear lead going forward. Along with 60 new staff members, Smith Micro will also pick up an additional 10 granted patents and 15 provisional or in-process patent filings.

In addition to complementing its current product lines, Smith Micro will also inherit a new line of software products aimed at the IP Multimedia Subsystem (IMS) market -- a fancy term for new architecture set up to more efficiently deliver feature-rich content and broadband media to wireless devices. Though this is still a developing market, PCTEL has already been working on delivering solutions with players such as VoIP infrastructure company Sonus Networks (Nasdaq: SONS) and Alcatel-Lucent (NYSE: ALU).

From this Fool's standpoint, the merger does look very positive for Smith Micro. It's also welcome news to Smith Micro investors, who have watched their stock shed more than 50% of its value after third-quarter earnings disappointed analysts, even though the company met analyst estimates. With the deal expected to close in early January, the only thing left now is the implementation. Smith Micro has proved itself good at doing that so far.

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