Comtech Systems headquarters. Photo: Comtech Systems

Comtech Telecommunications Corp.’s acquisition of Gilat Satellite Networks looks to be in trouble as Comtech has filed a complaint against Gilat alleging its business has taken a major hit, and taking issue with the restructuring of a Russian subsidiary. 

On Tuesday, Comtech and its subsidiary, Convoy Ltd. filed a complaint against Gilat in the Delaware Court of Chancery, which Comtech announced Wednesday. Comtech said Gilat’s business has been in a “precipitous decline” since the end of January when the merger was announced, and Comtech is assessing whether this decline gives rise to a Material Adverse Effect (MAE), meaning a change in circumstances that significantly reduces the value of a company. 

Comsys Senior Consultant Susan Bull said that like many Very Small Aperture Terminal (VSAT) manufacturers, Gilat is likely experiencing trouble with new VSAT installations because of the COVID-19 pandemic and its effect on installation technicians’ ability to travel. Bull said she can’t predict at this point whether the merger will go through. 

“I really have question marks behind all of this now that Comtech has filed their complaint. I really don’t know whether the whole thing will come together or not,” she said. 

Comtech’s complaint also seeks a judgement that certain actions, if taken by Gilat, would breach Gilat’s obligations for the merger. Comtech said the actions at issue relate to Comtech’s pending application for required regulatory approval in the Russian Federation.

Gilat put out its own response on Wednesday, and said the company has not been served the with “purported complaint,” and provided more details that it relates to “any unilateral actions taken by Gilat relating to the disposition or restructuring of its subsidiary in Russia or any unilateral action taken by Gilat concerning Comtech’s pending application to the Russian regulatory authorities.” 

Gilat said it believes Comtech is in breach of its obligations under the merger agreement and that the alleged claims are without merit. “Comtech is obligated to use its reasonable best efforts to consummate the merger, and that Gilat does not intend to sit idly and wait for the drop-dead date of the merger agreement,” Gilat said. 

A Gilat representative said the company was not able to provide any more information at this time. Comtech did not respond to a request to comment. 

These dueling releases came out about a week after Gilat’s CEO Yona Ovadia resigned, effective immediately. Ovadia originally was supposed to stay on as CEO of Gilat, according to the initial acquisition announcement in January. Gilat did not say last week why Ovadia suddenly resigned and declined to comment. 

Overall, Bull said she has been watching this merger to see if it would be as complimentary as the ST Engineering/iDirect acquisition of Newtec last year. Bull said she was curious why Comtech made the move to acquire Gilat following its acquisition of UHP Networks last year. 

She mentioned the challenge of integrating different types of Time Division Multiple Access (TDMA), Single Channel Per Carrier (SCPC) and Network Management System (NMS), star, and mesh capabilities from the different companies: “One would think the expectation for the future would be to integrate these systems. If you’re going to integrate the systems, the more you have, the more difficult it is,” Bull said. 

When the merger was announced, Michael Porcelain, Comtech’s newly appointed president, called the acquisition a “perfect match,” and that acquiring Gilat would boost Comtech in the backhaul and In-Flight Connectivity (IFC) markets, citing Gilat’s end-to-end solutions and its relationships with customers such as Go-Go, Honeywell, and Global Eagle. The IFC market has been hit hard by the COVID-19 pandemic. Global Eagle said in recent SEC filings that the company has a “substantial risk” of going into Chapter 11 bankruptcy. And GoGo furloughed 54% of its workforce, but recently said its Business Aviation segment is showing strong signs of recovery.