Technology distributor Ingram Micro Inc will buy smaller rival BrightPoint Inc for about $650 million in cash in its biggest deal ever, to expand in the higher-margin mobile devices market as demand for personal computers declines.
BrightPoint's shares jumped 64 percent to $8.88 in morning trading - just short of the 66 percent premium offered by Ingram - making them the top gainer on the Nasdaq.
The steep premium indicates the price technology products distributors are willing to pay as they explore newer markets, faced with dwindling PC sales and sluggish global IT spending.
"We were not surprised by Ingram's announcement, since new CEO Alain Monie has indicated his intent for the distributor to expand further into the mobility-distribution space," Stifel Nicolaus said in a note to clients.
BrightPoint distributes mobile phones and other wireless devices sold by companies such as Apple Inc, LG Electronics Inc and Nokia Oyj to customers, which include Sprint Nextel Corp, Vodafone Group Plc and RadioShack Corp.
Ingram is paying 10 times Brightpoint's expected 2012 earnings — nearly double the company's current multiple.
The deal is likely to boost Ingram's margins, which according to Thomson Reuters StarMine have remained flat at around 5.5 percent in the past few years. BrightPoint had gross margins of 7.2 percent in 2011.
"Expanding our presence in the mobility market has been a focus of Ingram Micro and the acquisition of BrightPoint accomplishes this to an extent that would have been challenging to achieve on our own," CEO Monie said in a statement.
The acquisition will help Ingram better compete with Tech Data Corp, which has a strong presence in Europe through a joint venture with privately held BrightStar Corp.
The deal, valued at about $840 million including about $190 million of BrightPoint's debt, will add 18 cents per share to Ingram's 2013 profit and 35 cents per share in 2014, the companies said.
Credit Suisse, which raised its price target on BrightPoint by $1 to $9 reflecting Ingram's per-share offer, said the deal was complementary to Ingram's existing offerings.
With PCs losing ground to smartphones and tablets, companies such as Ingram Micro and Arrow Electronics Inc have been looking to expand in new growth areas.
Arrow said in April it would buy Altimate, a distributor of computing products and services, to expand in Europe - its third acquisition this year.
Avnet Inc said on Monday it would buy a European distributor of data center services, Magirus Group, for an undisclosed amount.
BrightPoint, which operates in more than 35 countries, had revenue of about $5.2 billion in 2011.
Ingram Micro will fund the deal with existing credit facilities and cash on hand, and has obtained a commitment for a $300 million debt facility from Morgan Stanley Senior Funding.
Morgan Stanley & Co LLC acted as financial adviser to Ingram, while Blackstone Advisory Partners advised BrightPoint.
If Brightpoint terminates the deal, it will have to pay Ingram $26 million.
Ingram expects more than $55 million in annual cost savings by 2014 from the acquisition.
(Reporting by Bijoy Koyitty and Sayantani Ghosh in Bangalore; Editing by Mark Potter, Roshni Menon, Saumyadeb Chakrabarty)