Cohu HD Surveillance Manufacturer Acquired

By John Honovich, Published Jun 05, 2014, 12:00am EDT

One company has quietly doubled revenue in the last few years. The other company is a specialist in ruggedized, long distance surveillance.

In this note, we examine Costar's acquisition of Cohu HD, including the deal terms, financial details of the acquirer and potential growth opportunities.

Costar Overviewed

If you have never heard of Costar Video Systems, despite their $26 million USD revenue in 2013 [link no longer available], do not feel bad. The company does little marketing and has a nearly non-existent brand.

However, Costar has 2 big customers in Wal-Mart and Diebold. The two of these companies combine for ~70% of Costar's revenue.

While the company says they 'develop' and 'manufacturer' products, we believe they are mostly an OEM / ODM / re-labeller. Their gross margins are incredibly low (~28% compared to real manufacturers averaging 45% to 55%) and they do not break out any spending on R&D. Also, they note that one main supplier accounts for ~45% of purchases, another sign of relabeling / reselling other products.

Costar's products [link no longer available] are fairly generic mix of cameras and recorder boxes. There's no real standout products or positioning.

Cohu HD

CohuHD is/was a segment of Cohu, Inc, a publicly traded company generating ~$250 million in annual revenue. However, CohuHD, their camera / surveillance business, only represented a fraction of their business, as show in the excerpted table below:

Because of this, we believe that Cohu Inc. did not focus / prioritize the camera business sufficiently.

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Despite this, CohuHD did ~$15 million in 2013 revenue with a differentiated product line [link no longer available], including ultra long range HD cameras [link no longer available], a PTZ with extended temperature range to 80C [link no longer available] and a variety of IP67 positioner PTZ models.

The Acquisition

However, Cohu Inc sold CohuHD for ~$10 million [link no longer available], which is rather low for a $15 million business, and lower than CohuInc's overall price to sales ratio (a meager 1:1 themselves).

Costar has to finance this deal with new debt, as they have insufficient cash in the bank to pay for Cohu and only have a current market capitalization themselves of ~$16 million USD.

The Prospects

This is a strange combination. The acquirer has no significant technology differentiation and a super concentrated customer base in retail. The acquired does have specialized technology but for the industrial / municipal markets.

However, Costar has shown they can sell and they are not paying much for CohuHD relative to its revenue and products. If they can execute on selling CohuHD's portfolio, most likely to new market segments, it could be a win for them but it is a peculiar destination for CohuHD.

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