(By Balachander) Datalink Corp.'s (NASDAQ:DTLK) acquisition of IT services provider Strategic Technologies Inc. is a long-term positive for the company, writes FBN Securities analyst Shebly Seyrafi.
The provider of data-center services agreed to purchase Cary, North Carolina-based Strategic this Tuesday, following the acquisition of Minneapolis-based data center IT services firm Midwave Corp. in October 2011.
Seyrafi reiterated his "Outperform" rating, but lowered his price target on the stock to $10 from $13 a day after Datalink cut its outlook for the third quarter. Datalink said it saw expected contracts pushed back by as much as 90 days or more due to uncertain economic conditions.
The analyst said DTLK saw increasing customer cautiousness and contract push-outs (continuing a trend that it saw starting in June).
"However, we applaud the acquisition of StraTech and believe that with another possible similar-sized acquisition within 18 months, the company has the opportunity of getting close to its annual revenue and operating margin target of $750 million and 7.5 percent," Seyrafi wrote. "Note that DTLK is noting that its pipeline has never been stronger in terms of the number of overall opportunities and the number of million-dollar opportunities."
Seyrafi said he sees several positives from the Strategic deal, including addition of $65 million in incremental annual revenue, with higher GMs. StraTech's revenue had been growing 10 percent to 15 percent a year in 2011 and the first 9 months of 2012.
Although StraTech's operating margin is lower than DTLK, DTLK should have the ability to obtain synergies from cost rationalization, the analyst said and noted that DTLK expects the deal to be accretive to net income within a quarter.
The acquisition doubles DTLK's revenue from Symantec, a higher-margin category. It also increases DTLK's business with NTAP and HDS and adds a strong presence in archiving, Seyrafi wrote.
Datalink bought StraTech for roughly $13.2 million in cash and the issuance of 269,802 shares of Datalink common stock, assumed about $20.8 million of StraTech's liabilities and acquired around $16.0 million of assets.
On Friday, shares shed 13.28 percent to trade at $7.44. In the past 52 weeks, the stock has been trading between $6.94 and $11.00.