DVTel to Merge & Reverse IPO

Author: John Honovich, Published on Oct 31, 2011

In a surprising and aggressive move, IP video surveillance manufacturer DVTel is planning a reverse IPO through a merger with an existing penny stock company. In this note, we examine the plans, the details and the potential implications of this move. UPDATE: Feedback from DVTel's CEO included at the end of the note.

[UPDATE 2012: This merger has fallen through.]

DVTel Background

DVTel offers an end to end IP video product portfolio - from its own VMS software, to a line of IP cameras and video analytics (acquired from ioimage). At the end of 2010, the company had a significant management team shift.

Merger Company Background

DVTel is planning to merge with Suspect Detection Systems (SDS), a US publicly traded company with main operations in Israel. SDS's annual revenue is in the $1 to $2 Million range. The company has a market valuation of $4.6 Million though only trades, as of today, at 6 cents ($0.06 USD).

SDS's core product offering is an 'expert' system called COGITO used for screening and interrogations.

Proposed Merger 

The terms of the merger, as explained in the Letter of Intent, consists of the following key points:

  • The current SDS portion would be valued at 15% of the total combined entity.
  • The merged DVTel portion would be valued at 85% of the total combined entity.
  • DVTel would be valued at nearly 6x that of SDS.
  • New financing of at least $5 Million USD is part of the deal.

The parties have to the end of January 2012 to finalize and complete the deal. From the LOI, it appears they have been working on this since at least early August.

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Our Analysis

This deal is basically a Reverse IPO commonly defined as "the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public." This deal meets the conditions because DVTel is clearly being valued at much higher levels than the public company that they are merging with (which makes sense because DVTel's revenue - in the tens of millions - is far higher than SDS's). Indeed, we do not see great value nor 'synergy' between the two company's product offerings.

Reverse mergers are not common within surveillance (the last one was tiny Iveda Systems in 2009) and they do not have the best reputation as the method is a shortcut of the normal IPO process used often by companies not strong enough to pursue more traditional means.

Companies pursuing reverse IPOs typically see two main benefits - (1) the potential to raise additional capital in the public markets and (2) as a publicly traded company with stock liquidity, it might be easier to acquire companies.

One thing is for sure; If the deal does go through, DVTel will have to release full audit financial statements providing the community a much better look at their actual market performance.

DVTel CEO Feedback

We spoke with DVTel's CEO to learn more about the Letter of Intent and potential merger with SDS.

He mentioned that the company is currently evaluating a number of financial transactions, including this one as well as others within the surveillance industry. As part of this, the company is looking to raise funding.

DVTel's CEO noted that SDS offered some synergies in terms of similar distribution and customer base but that the technologies (DVTel's and SDS's) are not likely to be integrated. If the deal is completed, the company's stock would likely move to a stock exchange based on DVTel's significantly larger size/revenue than SDS.

In terms of company strategy, DVTel's CEO re-emphasized the company's committment to provide end to end solutions from camera to monitor. Their focus within this would be on software/firmware development whether it be for cameras, analytics, recording, managing, etc. One particular area the company is targeting improvements is simpifying their offering to increase its competitiveness and ease of use for the mid market. Traditionally, DVTel has been strongest at the high end / large scale side of the market.

DVTel's CEO would not disclose specifics on current revenue nor financial growth but noted that the company's performance has improved in the second part of 2011 compared to the first half.

[UPDATE 2012: This merger has fallen through.]

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