DATALOGIC TO ACQUIRE PSC: NEW COMPANY OR TWO COMPANIES UNDER ONE UMBRELLA?
28 October 2005 - Venture Development Corporation

In addition, being acquired by Datalogic as opposed to a larger AIDC or IT organization or a financial institution may provide PSC with much needed stability while preserving their global brand identity.

According to Datalogic, there are no immediate plans for operational integration of both organizations and rather Datalogic is focusing on developing long-term strategies. In fact, 'business as usual' is the message being communicated internally. This approach, while maybe the most prudent considering recent AIDC industry M&A track record, calls the acquisition's overall objectives into question. Datalogic claims that the primary objectives for the acquisition include:

1. Leveraging PSC's strong position in the US market;
2. Leveraging PSC's broad retail installed base; and
3. Providing stability to PSC's operations and longevity to the PSC brand.

However, by keeping PSC a separate entity, Datalogic is not expected to significantly achieve against the first two objectives anytime soon. Although cautious tactics may prove critical given PSC's tumultuous past, several poorly selected and transacted acquisitions leading up to filing for Chapter 11 in 2002 and eventual buyout by Littlejohn.

Furthermore, although consolidation continues to be a consistent theme in the AIDC market, bigger has not necessarily meant better, at least not recently. Overall performance among tier II AIDC vendors (PSC, Metrologic, Hand Held Products and Datalogic) has exceeded that of tier I vendors over the past two to three years in several technology segments. The last two years of relative stability and management consistency at PSC has allowed the company to grow their topline numbers and regain leadership positions in several key markets such as stationary POS scanning.

While Datalogic does not want to disrupt this track record, as AIDC and mobile and wireless technology continues to mature, scale, especially for product development and manufacturing, will clearly be a strategic ingredient for a company of Datalogic's size. Through this and several other recent acquisitions Datalogic has pieced together a formidable AIDC presence. However, the success of these transactions will be based on the company's ability to overcome geographic and cultural differences and leverage efficiencies in manufacturing, sales and distribution and support. Other recent acquisitions and investments include:

1. Acquisition of Dallas-based Informatics, a RFID and AIDC integrator in early 2005;
2. A minority stake in Alien Technologies in 2004;
3. Acquisition of laser coding vendor Laservall in 2004; and
4. Acquisition of Scandinavia-based mobile device vendor Minec in 2003.

Datalogic's 2004 revenues reached $193 million while PSC's revenues were $229 million. Their combined revenues 2004 revenues of $422 million would make them the fourth-largest AIDC hardware vendor. The combined company will hold leadership positions in several scanning segments and improve their overall position in the mobile computing market.

Critical opportunities and gaps in the combined company's portfolio include:

Handheld scanner leadership. With Datalogic's strong position in the imaging market and PSC's strong position in the laser scanning market the combined entity should be well positioned to compete against other handheld scanner leaders Symbol, Hand Held Products and Metrologic. However, overall handheld scanner growth over the next five years is forecast to be moderate at best.

Stationary scanner leadership. Although limited synergies exist between Datalogic's industrial stationary scanner business and PSC's retail POS business, the combined company will have the broadest stationary scanning product portfolios.

Mobile and wireless uncertainty. Neither company can be considered leaders in enterprise mobility. While their combined operations will vault them into the top ten in share, the value is questionable. Their product portfolios are one or two generations behind the competition in terms of software solutions, wireless communication options and form factor/design. Although the mobile and wireless market provides some of the strongest growth opportunities, it is also one of the most fiercely competitive. However, in Jack Farrell, Datalogic has a seasoned mobile and wireless veteran (former LXE) and he could provide valuable leadership in that segment.

Pockets of RFID investment. Of the two companies, Datalogic has the longer track record with RFID, mostly through its EMS subsidiary. In addition, Datalogic has a minor ownership position in Alien Technologies. EMS is best known for low frequency and microwave RFID solutions for WIP applications in manufacturing requirements. More recently, they have been focusing on developing UHF solutions in response to the recent EPC mandates. EMS does not currently have a strong RFID brand identity outside of manufacturing markets and is frequently not associated with Datalogic. PSC is a charter member of Intermec's RapidStart RFID licensing program. There are ultimately some branding and messaging decisions than need to be made as it relates to RFID within Datalogic and PSC.

Critical opportunities and gaps in the combined company's portfolio include:

Decrease European exposure. Clearly Datalogic's Achilles Heel recently has been its heavy reliance on the European market. While the company has grown consistently, much can be attributed to recent acquisitions of companies like Informatics, Laservall and Minec. Organic growth has been in the mid-single digits; a result of the depressed market conditions in Europe. The PSC acquisition provides much greater regional balance to their revenue stream and greater access to the US market for core Datalogic technology.

Vertical market diversification. From a vertical market perspective, there is limited overlap between both organizations' core segments. Datalogic is more focused on industrial and transportation/distribution while PSC's products are predominantly adopted in retail settings. Datalogic is clearly interested in gaining a stronger footprint in the retail segment, however, as recent performance suggests, this is a highly cyclical and mature market segment. Future growth - especially for mobile and wireless solutions - is expected to stem from markets and applications such as field service, field sales and professional services.

Sales and distribution channel synergies. While both companies rely heavily on indirect distribution channels, PSC reinstated a direct sales channel several years ago (focus mostly on POS solutions). The greatest current overlap and potential for conflict in sales and distribution infrastructure is in Europe, however, PSC's is mostly targeted toward the retail sector while Datalogic's targets industrial markets. Datalogic's intent to expand their footprint in the US will require them to leverage PSC's current infrastructure.

As this acquisition is primarily about gaining access to markets and accounts and less about gaining IP position in new or emerging technologies, its success will be dependent upon Datalogic's ability to integrate both organizations and leverage synergies where available. However, PSC will likely benefit from Datalogic's initial 'hands' off' approach and long-term outlook. Critical will be Datalogic's ability to effectively execute and communicate a cohesive strategy for core AIDC and mobility products and emerging RFID strategy internally for employees and to current and prospective clients. Equally important will be Datalogic's approach to managing and maintaining PSC's brand. We ultimately view this as a positive development for the industry and for Datalogic and PSC; however, have reservations about the approach and timing of the organizational and operational integration.

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