Shares of Sierra Wireless Inc. (SWIR) declined 11.8% in December, according to data from S&P Global Market Intelligence, in a combination of giving back last month's late gains and as the Internet of Things (IoT) pure play completed a dilutive strategic acquisition.
More specifically on the latter, the bulk of Sierra Wireless' recent decline came after Dec. 7, when it marked the completion of its previously announced $107 million acquisition of managed enterprise IoT solutions provider Numerex.
It didn't help that Sierra Wireless was already in the crosshairs of year-end profit takers; the stock is still up more than 30% for all of 2017, including a sharp pop in late November following an upgrade from Raymond James Analyst Steven Li. Recalling that shares had plunged despite Sierra Wireless' strong second-quarter report, Li argued that investors were being given "an attractive entry point" -- particularly as the market seemed to be discounting the company's recent design wins in the automotive industry.
Nonetheless, it might seem strange that completing an acquisition of which investors were already aware would lead the stock lower. But the event also served as a reminder that, according to the terms of the stock-for-stock deal, Numerex investors were to receive 0.18 Sierra Wireless shares for each Numerex share they owned. As such, Sierra Wireless issued nearly 3.6 million new common shares, bringing its total number of common shares outstanding to just over 35.8 million. In other words, Sierra Wireless had to dilute its existing shareholders by a little more than 11% to complete the acquisition, and Numerex shareholders now own around 10% of the business.
However large the purchase was relative to Sierra Wireless' market capitalization -- which stands at just over $650 million as of this writing -- we also shouldn't forget why Sierra Wireless pursued Numerex in the first place.
"The acquisition of Numerex accelerates our IoT device-to-cloud strategy by adding an established customer base, significant sales capacity, proven solutions, and recurring revenue scale," explained Sierra Wireless CEO Jason Cohenour. "The combination of Sierra Wireless and Numerex will represent a powerful business and technology platform that will enable the company to drive a global leadership position in IoT services and solutions."
Numerex was already generating annualized sales of $66 million at the time of the acquisition, over 90% of which came from recurring sources. From here, we'll see Numerex's results folded into Sierra Wireless' cloud and connectivity segment.
In the end, Sierra Wireless is still a relatively small company that sits near the start of its long runway for growth, and I don't think last month's decline should be of much concern. Rather, I believe investors would do well to take advantage of the pullback to open or add to their positions.