Market Overview

Why InterCloud Systems Was Up More than 20 Percent Friday

If you owned shares of InterCloud Systems (NASDAQ: ICLD) prior to Friday, you’re having a great week.

The stock was up as much as 35 percent and has settled in with gains of about 20 percent in Friday trading.

The reason for the move is a press release from the company Friday morning announcing the acquisition of Integration Partners-NY Corporation. (IPC-NY) The company will finance the acquisition through $11.62 million in convertible debentures, which mature in June of 2015.

InterCloud is in the technology space that investors love: The cloud. The $72 million company provides design, installation, and maintenance of cloud services, along with IT consultation, and voice, data and optical services to end users.

It’s acquisition of IPC-NY will add $25 million in gross revenue and income of $3.5 million in 2013, according to the release.

Related: The Market Noise Is Just That: Noise

IPC-NY is an IT firm that offers similar services as InterCloud. According to the company website, it provides everything from network management to the installation of green data centers.

InterCloud CEO Mark Munro said, "We are excited about the synergies this acquisition brings to InterCloud and its immediate accretive earnings effect. IPC-NY is a growing business with a seasoned and successful management team.”

But is today’s news a reason to jump into InterCloud?

While acquisitions are normally a means of growth for larger companies, InterCloud acquired a string of companies in the past two years. Prior to today’s news it announced that it had acquired AW Solutions for $5.2 million in April of this year.

In 2012, the company made two acquisitions—more than investors would normally expect from a small cap. name.

Until October 31, the stock traded on the OTCQB. Investors are often hesitant to invest in small speculative companies listed outside of the major exchanges because of liquidity risk and a lack of coverage. InterCloud’s October 31 IPO as a NASDAQ stock added credibility, further company coverage,  and a whole lot of liquidity.

Before the stock listed on NASDAQ, it traded an average of 10,000 shares daily. Since it’s listing, nearly one million shares trade daily with today’s volume already topping 2.8 million as of midday.

InterCloud IPOed at $4 per share—well below the expected range of $5 to $7. Post-IPO, the stock fell to $2.20 but after a better than expected earnings announcement last month, the stock rocketed up to a high of $14.58 only to settle in around $9 per share after profit taking—a price point where investors seem to have felt comfortable valuing it.

Friday’s announcement added 20 percent but with a stock as volatile as InterCloud, committing new money may not be wise until any profit taking is complete and investors reprice the stock.

Many of its metrics are impressive headline numbers. According to its third-quarter release, revenue was up 448 percent year over year but some of it stems from the close of 2012 acquisitions.

A Seeking Alpha article pointed out that InterCloud’s strategy with acquisitions is to gain a more international presence but along with acquisitions often comes more debt. For that reason, don’t look at triple-digit moves to the upside and decide to pour money into any name.

How is the company handling the debt that comes with acquisitions? What is CEO Mark Munro’s plan for differentiating the company from the many other cloud providers? This information is in the earnings statements and data at InterCloud’s investor page.

All of the big names that capture the news headlines once started as small companies. Finding the up-and-comers is worth a small allocation of your portfolio dollars.

Disclosure: At the time of this writing, Tim Parker had no position in the company mentioned and has no plans to purchase in the near future.

Posted-In: Integration Partners InterCloudNews M&A Best of Benzinga

 

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