—David Porter, American Naval Officer, 1813-1891
The future of U.S. government agreements to purchase commercial optical satellite imagery is in limbo, and the natives are growing restless. OnMay 4, 2012, GeoEyeCEOMatt O’Connell hurled a shot across DigitalGlobe’s bow with an unsolicited public offer to purchase the company for a combination of cash and stock equivalent to $17 a share. DigitalGlobeCEOJeffrey Tarr fired back on May 6 with the expected response—forget about it.
Mine’s Bigger Than Yours
In a letter to O’Connell, Tarr indicated that as early as February 2012, GeoEye made several private proposals to purchase DigitalGlobe, which DigitalGlobe rejected and countered with its own offer to acquire GeoEye. Tarr said he was surprised by O’Connell’s public offer because if the companies were to consolidate, his firm is in a superior position to be the acquirer for a number of reasons, among them a more robust satellite constellation; a better track record of delivering the goods under the EnhancedView contract shared by both companies; and a higher organic growth rate of 12 percent compared with GeoEye’s 3 percent.
As a result of this recent saber rattling, no fewer than four law firms specializing in shareholder interests have announced they’re looking into the matter to determine whether DigitalGlobe’s board of directors breached any fiduciary duties associated with the offer, and whether GeoEye’s offer undervalues DigitalGlobe.
Glancing at the Numbers
At least one analyst on Yahoo! Finance has tagged a 12-month price target of $36 a share on DigitalGlobe. Of course, this is nothing more than an educated guess by one person. But even with future revenue factored out, $36 a share, at least on paper, is in line with the stated assets on DigitalGlobe’s balance sheet—just south of $1.5 billion dollars. Conversely, $17 a share would value the company at a little more than half of that amount. So it appears that DigitalGlobe’s true worth lies somewhere between the two amounts, leaving plenty of room for speculation. Meanwhile, shares of both GeoEye and DigitalGlobe are well off their 52-week highs of last summer, down more than 50 percent and 40 percent, respectively.
As the dialogue between O’Connell and Tarr grabs headlines, absent is any precise news from the government on impending spending reductions, even though GeoEye and DigitalGlobe are integral components of the geospatial food chain that feeds primarily the National GeoSpatial-Intelligence Agency (NGA), as well as the Department of Defense and the intelligence community at large.
Without 100 percent clarity on this key metric, it’s practically impossible to fairly value either GeoEye or DigitalGlobe. And if the government does have an idea about how things are bound to play out, nobody appears to be sharing any hints with the CEOs.
One industry insider told me the recent posturing by these firms was more entertaining than substantive. Nevertheless, neither company generates enough commercial sales revenue to survive significant government spending cutbacks. Pending the final budget outcome, they may indeed have no alternative but to merge. If this occurs, the resultant entity would be the undisputed powerhouse of commercial optical remote sensing.
The shareholders of both companies would become long-term beneficiaries of any equitable union. More immediately though, the disadvantage goes to those employees who occupy redundant positions at the two firms, many of them friends and colleagues of our staff. To them, all we can say is keep the faith.
— Jeff Specht, publisher, Earth Imaging Journal