DragonWave Inc. (NASDAQ: DRWI) announced its plans to acquire the microwave transport business from Nokia Siemens Networks in a cash and stock transaction valued at about $154 million.

DragonWave also said it may also become a preferred supplier of packet microwave and related products to NSN, and the companies would jointly coordinate technology development activities.

Nokia Siemens Networks and DragonWave believe the proposed acquisition and supply agreements will accelerate innovation in backhaul products, supporting world-class microwave solutions for mobile operators. The companies aim to complete the planned acquisition and supply agreements in the first quarter of 2012, which is the closing date.

After the closing of the proposed acquisition, Nokia Siemens Networks would retain responsibility for its existing solution sales and associated services for microwave transport while DragonWave would be responsible for the product line, including R&D, product management and operations functions.

The consideration to be paid upon the transaction's closing comprises 10 million euros in cash and DragonWave stock worth another 5 million euros. Also, about 360 employees, mainly based in Milan and Shanghai, may be transferred to DragonWave as part of the deal.

DragonWave will also assume employee liabilities of about 10 million euros and will enter into a capital asset lease arrangement for approximately 5 million euros. The terms of the Master Acquisition Agreement also provides for sales performance based earn-out payments to be made following closing.

The hardware and basic software earn-out period runs for 18 months after closing and the earn-out period on application software upgrades runs for four years following closing. The earn-out payments could raise the value of the transaction by about 80 million euros.

DragonWave expects to finance the transaction through a combination of cash on its balance sheet and increased debt facilities provided by Comerica Bank and Export Development Canada. Such debt facilities are subject to conditions and will be entered into on and subject to closing of the acquisition.

Jefferies upgraded its rating on shares of DragonWave to buy from hold and increased its price target to $10 from $3.50, due to the transformational acquisition.

With the acquisition of NSN's microwave backhaul business, we believe DragonWave has a huge revenue opportunity in Western and Southern Europe with the 2014 LTE network upgrades, said Peter Misek, an analyst at Jefferies.

Also, Misek sees the technical limits of NSN's current portfolio as complemented by DragonWave's industry-leading IP Ethernet backhaul that we see as integral for LTE and VoLTE networks. DragonWave is borrowing $25 million to $40 million for restructuring costs and working capital.

Misek said four quarters after the transaction's expected January/February close, management targets $100 million in quarterly revenue, 30 percent gross margin, and 10 percent operating margin versus DragonWave's August quarter reported revenue of $14 million, 42 percent gross margin, and 56 percent negative operating margin.

On Friday, Sprint announced a debt raise and a potential funding of Clearwire (NASDAQ: CLWR). Misek believes Sprint is still trying to determine how much of its future network it will build itself versus funding Clearwire.

He said DragonWave would benefit from both builds but more from Clearwire. He continues to model the beginning of a ramp in DragonWave's organic business in the May quarter and that it will last six quarters.

Europe LTE build-outs should ramp up as Sprint/Clearwire builds ramp down. He estimates that in the second half of calendar 2013, Europe is likely to start its LTE builds. He believes DragonWave should be well positioned due to its packet-based (from its core business) and hybrid (from NSN) equipment combined with its NSN-derived European customer relationships.

The near-term risks include: volatile second half telecom equipment spending environment, we see DragonWave undertaking much of the integration at the same time as its core business is likely to ramp at Sprint or Clearwire, and historical operating expense for the acquired business was not disclosed, said Misek.

The brokerage widened its fourth quarter loss per share estimate for DragonWave to $0.14 from $0.11 and its 2012 loss estimate to $0.68 from $0.59. However, the brokerage raised its 2013 EPS estimate to $0.65 from $0.53.

DragonWave stock closed Friday's regular trading up 41 percent at $5.09 on the NASDAQ.

China NASDAQ Stock Market China Management