Reading the tea leaves: Why Tyco Electronics wanted ADC

Jim BartholdIt doesn't take a genius--immediately qualifying me--to understand, or at least perceive to understand, the implications of Tyco Electronics' (NYSE: TEL) $1.25 billion acquisition of ADC (Nasdaq: ADCT). The list starts with Tom Lynch, TE's CEO and a man who cut his teeth in the cable distribution equipment business; It ends with DAS--Distributed Antenna System--technology at which ADC excels.

DAS could be a door opener for a cable industry eager to get into the wireless business or just eager to expand its capabilities within its existing WiFi business. Initially designed to enhance wireless coverage within small areas where large numbers of people will be tightly packed, such as sporting events and concerts, DAS has a larger purpose that can easily fit with cable's plans for broadband everywhere.

DAS antennas, unlike those used by wide area networks, are deployed on utility poles and similar structures and communicate with each other in a mesh design. Because they typically sit lower than cellular antennas, they develop a powerful self-healing network as all the antennas talk to each other. You can see how this would be helpful in a stadium or even an urban hot zone or enterprise. Expand it out and you can see a similar benefit to a cable operator deploying a WiFi cloud over an entire franchise area--such as what Time Warner Cable (NYSE: TWC-WI), Comcast (Nasdaq: CMCSA) and especially Cablevision (NYSE: CVC) are doing in the New York City metro area. Just hang antennas on the existing cable gear and you're ready to go.

Even with so much potential, DAS has been slow to develop, partly because ADC's customer base is the wrong target audience. DAS, despite it all, isn't something a traditional cellular carrier would purchase because it would revamp the traditional cellular structure and that would require money. It's also not something that a traditional wireline telco would want because wireline telcos don't want to compete with their wireless brethren. It is something that a cable operator could find useful.

Enter Tyco Electronics. Lynch is only one of a group of former cable executives running the suburban Philadelphia company that right now makes its money on connected devices for automotive and industrial equipment. Keep that term, connected devices, in mind and then mesh it with DAS--and you can see where this new relationship could lead.

"The strategic appeal of this acquisition to us is that we're complementary in products and in the channels and geographies we serve," Lynch told analysts during a call explaining the purchase.

Complementary, but exclusive. ADC targets one audience and Tyco Electronics another. Combined, they can target both those audiences and add a third: cable.

"This transition establishes us as a leader in connectivity in the telecom networks and it fits right with the strategy that we've had under way for several years now," Lynch said.

And that would be?

"We want to be a leader in the broadband play," he said. "I think we have the opportunity to create a really, really good telecom networks business."

While Lynch consistently paid homage to "carriers" and "enterprises" as customers, these are not the groups who will carry the combined entity forward. If they were, ADC wouldn't need TE. What's going to move the new Tyco Electronics is DAS, and what's going to move DAS is cable.

"When you step back, we're going to be a $2 billion-plus player in the combined carrier and enterprise space with these types of products and we're going to be one of the two or three players in the world bringing these types of products and services to the carriers," Lynch said.

Read the tea leaves, and it's an easy next step to substitute MSOs for carriers. The money only goes up from there.

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