San Diego Business Journal

BY BRIAN WOMACK

Powerwave Technologies Inc. hit a key benchmark this past summer in its makeover efforts of the last few years: a $1 billion market value.

Powerwave, a Santa Ana-based maker of amplifiers and other gear for wireless phone networks, has been worth $1 billion before. During the boom year of 2000, the company was worth around $3 billion.

But that's ancient history.

For the past few years, Powerwave has rebuilt itself by outsourcing production to Asia, reordering its executive ranks and making acquisitions.

Powerwave now is a dominant player in wireless equipment, after several years of tumult that left just two big players standing , itself and Chicago-based Andrew Corp.

Smaller wireless network gear competitors include Filtronic PLC, Fujitsu Ltd. and Hitachi Kokusai Electric Inc.

Powerwave's growth came from aggressive buying. The company now has about 60 percent of the market for antennas, boosters, combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and other gear.

Sales grew 57 percent to $218 million in the third quarter, spurred by recent acquisitions.

The deals, including the recent buy of part of Del Mar-based Remec, Inc., have helped stabilize prices by cutting the number of competitors.

They've also boosted Powerwave's sales to big companies, such as Sweden's Ericsson and Finland's Nokia.

Despite growth during the past few years, Powerwave has remained under the radar.

Powerwave keeps a low profile and doesn't get many mentions in the national press. It didn't return calls for this story.

Investors haven't overlooked the stock.

Powerwave shares are up some 60 percent during the past six months, giving it a market value of about $1.3 billion. The company's shares, now at about $13, traded around $3 in fall 2002.

Competitor Andrew has seen its shares fall more than 20 percent during the past six months and has a market value of about $1.7 billion.

Key Move

Powerwave's key play was September's buy of Remec's wireless business, said Casey Ryan, an analyst with Nollenberger Capital Partners Inc. in San Francisco.

The Remec unit made amplifiers, filters and antennas. The company also had a defense business, which was bought by Chelton Microwave Corp.

For a while, Remec tried to win market share by slashing prices. That made it difficult for others to post profits, Ryan said.

Remec's formula was doomed in the long term, according to Ryan.

"Remec was basically saying, 'I'm going to die, so you're going to die, too,' " he said. "They were growing sales a little bit but they were losing more and more money every quarter."

That spelled opportunity for Powerwave.

Powerwave got Remec for about $118 million in cash and stock. The deal worked out to less than one multiplied by the unit's annual sales , below the going rate for acquisitions in the industry, Ryan said.

The buyout price was seen as too low by some shareholders, who pressed Remec management to renegotiate.

The companies did rework some of the tax implications of the deal, which was a key demand of some shareholders. The financial terms of the deal didn't change.

The Remec buy was the latest in a series of acquisitions in the industry that shrank the number of big competitors, Ryan said.

Industry Consolidation

Consolidation took off after the severe telecommunications downturn that began five years ago, crippling many companies and slashing stock prices.

Remec bought a couple of companies before its own sale. And Powerwave has picked up a handful as well, including Sweden's LGP Allgon Holding AB, which strengthened ties to Nokia and Ericsson.

Powerwave's main product is the power amplifier, which helps wireless tower signals go farther and work with more phone users.

The company also does contract manufacturing work for customers. That unit accounted for about 4 percent of its sales in the third quarter.

Powerwave's largest customers in the third quarter were Cingular Wireless LLC, which accounted for about 17 percent of its revenue, and Nokia, which made up more than 10 percent.

Motorola Inc., Lucent Technologies Inc. and Nortel Networks Corp., which together accounted for 24 percent of sales last year, are other big customers.

Powerwave has focused on keeping costs low, getting gear to customers quickly and cutting the number of defects.

Its cost-cutting efforts included shifting some manufacturing from Santa Ana to Asia a few years ago. The move shaved about 600 workers from its local operations.

Reliable Supplier

"The reason Powerwave won a lot of business is they were viewed as the most reliable supplier," Ryan said.

But with few competitors left to acquire, Powerwave's gains are likely to follow growth of the wireless industry.

"It will be hard for them to grow much above their customer base," Ryan said.

Analysts peg overall growth for wireless gear at about 10 percent next year.

Michael Ounjian, an analyst with Credit Suisse First Boston in New York, rates the stock as "underperform."

The company's third-quarter revenue was above some estimates. But the fourth-quarter outlook of $255 million to $265 million was a bit under Ounjian's estimate of $266 million, according to a research note.

For now, Powerwave plans to go after production that some telecom companies are doing themselves. Powerwave hopes to convince them it would be better to buy all of their gear from an outside seller.

The company's chief executive, Ron Buschur, has been happy with Powerwave's growth. He expects more.

"We would certainly like to accelerate it," Buschur said during a recent call with analysts.

Buschur took over Powerwave this year when longtime Orange County technology executive Bruce Edwards stepped back.

Edwards, a former executive with defunct computer maker AST Research Inc., came to Powerwave in 1996. He's now executive chairman.

Buschur was Powerwave's chief operating officer since 2001.

Brian Womack writes for the Orange County Business Journal.