Another public Canadian enterprise is about to be swallowed by rapacious foreigners. No, this isn’t an oil and gas play being sucked up by a Chinese company, but the more traditional bane of nationalists. In this case it is Florida-based Harris Corp. that has made a $14-a-share cash offer for Toronto-based Leitch Technology.
Contra the Heard’s experience with Leitch is a reminder that there are few contrarian companies; select stocks are simply contrarian at particular points in time. In fact, for many years Leitch was a very popular selection for analysts and institutional investors. In 1997 the stock notched a high of $45; that same year it gained membership in the old TSE 300 index.
But the company’s reputation was steadily eroded by a pattern of poor earnings, lowered guidance, management shuffles and shareholder dilution. After control of the index passed to Standard & Poor’s, Leitch got the unceremonious boot in June 2003, when it was trading at $4.50. The profile of the company slipped further when it gave up its Nasdaq listing the following month.
We watched Leitch’s struggles and puzzled over a suitable entry point. A critical catalyst in our view was the hiring of Tim Thorsteinson in December 2003.
Mr. Thorsteinson had led a successful turnaround of broadcast equipment manufacturer Grass Valley Group, culminating in its sale to Thomson, the French electronics giant. At first it looked as if Mr. Thorsteinson might be diverted by a bubbling shareholder’s revolt, but once this was successfully quelled, we bought our position in February 2004, at $4.82.
So often, investors in high technology are convinced that it is critical to get in on the “ground floor” of innovation. But frequently it doesn’t work out that way. Leitch’s 1997 annual report was entitled “Here Comes the Future.”
Shareholders were warned not to blink, or they would miss the next electronic revolution. But the transformation from analog to digital television turned out to be more evolutionary than revolutionary, and the anticipation of a bonanza of equipment sales created a host of competition.
The next step in this pattern of innovation is consolidation, where smaller and weaker players are absorbed by those with more financial clout. For example, just last month Avid Technology, a leading software and hardware provider for digital media, completed a buyout of Pinnacle Systems in order to gain better access to the consumer market.
Leitch itself broadened its scope with purchases of Inscriber Technology and Videotek. For Harris, primarily a communications company that makes more than half its revenue from the US government, moving into broadcast equipment is an effort to boost growth by gaining more sales in the private sector. Encoda Systems was bought for $340 million (US) last November; picking up Leitch will make Harris a serious contender in the field.
Ray Bradbury’s dystopic vision of wall-sized televisions filling our waking hours with images is coming closer to reality. That leaves us cold, but we are warmed by the 211 percent return on investment in less than two years that this deal represents. The agreement requires a two-thirds majority of shareholders to be approved. We’ll be giving it two thumbs up.