Sierra Wireless (NASDAQ: SWIR) -- the turnaround story. In my previous articles regarding the company, we quickly learned that the Internet of Things, though a massive opportunity, has its own risks and roadblocks. Now, we will consider whether management can successfully navigate the Internet of Things landscape with its acquisition strategy.
Acquire to ride
In its transition to a pure play IoT company, Sierra Wireless has closed four acquisitions in the past year and a half: AnyData, In Motion Technology, Wireless Maingate AB, and Accel Networks. The companies and their purchase prices included:
- AnyData extended the company's global leadership position in the IoT market with machine-to-machine, or M2M, modules and modem assets, giving it a leading market share in South Korea ($5.9 million).
- In Motion bolstered the company's position in key market segments and broadened its enterprise solutions with rugged in-vehicle mobile routers used by public safety, transit, and utility fleets across the U.S and Canada ($26.1 million).
- Wireless Maingate added connectivity and data-management services to the company's enterprise-solutions segment ($90 million).
- Accel provided secure, managed 4G LTE connectivity services in the U.S. ($10.8 million).
But wait, there's more -- management has stated that "we will continue to pursue strategic acquisitions that help us accelerate our business, expand our position in the value chain, and create lasting shareholder value." That suggests the company needs this heady pace of buyout activity to ride the IoT wave. Sure enough, Sierra announced the $15.7 million purchase of MobiquiThings in late June. The French mobile virtual network operator focuses on connectivity services for industries like energy, transportation, retail, and healthcare.
Acquiring is the easy part. Getting the buyout targets to deliver on expectations, however, is not so simple. Even when M&A deals aren't written down -- though they often are -- they frequently don't meet management projections. As noted in my previous article on Sierra Wireless, heavy acquisition activity is a potential red flag that can land a stock on legendary investor Peter Lynch's aforementioned "stocks to avoid" list. Specifically, Lynch is wary of seeing acquirers pay too much for companies and/or diversifying outside their core competencies or realm of understanding.
Actions speak louder than words
One way to assess whether a company can successfully grow through acquisitions is to examine its financials for impairment charges. These show up when a deal turns out worse than expected, because the acquirer overpaid or failed to integrate successfully. Admittedly, there's a time lag between the acquisition and the impairment charge (typically years), so a lack of impairment charges is not a clear thumbs-up. On the other hand, a history of impairment charges could be evidence of a weak strategy and management team.
Unfortunately, Sierra Wireless has taken asset impairment charges in three of the past four years. The charges as a percentage of assets are not noteworthy, but they are more significant as a percentage of expenditures on acquisitions.
Management the issue?
Is there reason to believe that Sierra Wireless' acquisition track record will improve? Would new management perhaps help?
Well, there haven't been any management changes at Sierra Wireless that give us reason to expect the company strategy to change dramatically. For example, the president and CEO has held his position for 10 years, the CFO for 11, head of operations for 13, and the head of OEM solutions for 12. The SVP of corporate development and marketing -- a key role given the company's acquisitive nature and lackluster revenue performance -- has eight years of tenure.
It's not just management's acquisition track record that's underwhelming. As noted in two recent articles, the company has delivered relatively disappointing financial performance for the past five years, even though it claims leadership in the machine-to-machine, or M2M, communications market. Management is arguably subtracting value, given how often its return on equity has been negative in the past 10 years. ROE is widely considered a measurement of how effectively management uses stockholder capital. Note that ROE has been negative on an annual basis since 2009. To be fair, General Electric, another company looking to the IoT for growth, has also seen it's ROE dip recently. That said, GE's reputation as a well-managed company is supported by a much steadier and higher ROE prior to 2015.
When financial results are poor, it's not uncommon to see new management brought in. Sometimes, the CEO shuffles his or her staff. For example, Bank of America just replaced its CFO and its head of wealth management and reassigned other senior executives. In other cases, the CEO is pushed out, and the new leadership will replace senior executives, which recently happened at Microsoft. But such changes don't seem to be in the cards at Sierra Wireless.
Although Sierra Wireless' financial performance and acquisitions have been disappointing for years, there haven't been any significant management changes that suggest results will take a turn for the better. In our next article on the company, we'll see how how well the turnaround plan is working.