Welcome to Company Focus. My name is Aamer Nawid, Analyst at Fat Prophets. Today I'm going to be taking a look at a company which has had an eventful 2011 so far, technology company Pace. I'm going to be having a look at the share price action today and then obviously taking a view on whether Pace is actually a takeover target given its recent share price weakness.

So what does Pace do? Well basically, it's a technology provider for pay TV companies or companies which provide broadband services, companies like AT&T in the United States. Pace is basically the biggest set-top box maker in the world and as you can see from the chart here, the share price so far this year has been very volatile. This is compared to the FTSE 250. Pace has underperformed by quite some distance as you can see mainly due to two sort of moves downwards. One in March and one in May.

Now what were the catalysts for these moves? Well they were the reports of the company. Firstly, the 2010 report and secondly, the Q1 report. So you can understand shareholders would be a bit nervous when the company next reports, but in each instance I think that the company is actually, or the market rather, has actually overlooked a degree of good news and really focused in on the negative stuff.

In March it was the full year results. All the focus was on one of Pace's US customers Push Back and Order so that the revenue would not come in until 2012. The market reacted accordingly. It overlooked the fact that 2010 had seen pretty decent profit growth and the management had been quite optimistic about the outlook beyond sort of 2011.

In May, just two months later, the share price dropped again. This time volumes were stable. It was a Q1 report. Volumes were stable. Revenues were up by 24%. The company even signed a couple of big emerging markets contracts. But, all the focus again was on the negative impact of the tsunami in Japan and the poor performance of Pace in Europe and the closure of Pace Networks.

If you look at Pace in isolation here you can see that recently, over the last few days, the share price has actually ticked up a little bit. I think this is due to the fact that Pace is now being linked, or looked at as a potential takeover target.

From where I can see it, if the share price persists where it is, then it's only a matter of time before someone comes knocking.

There are plenty of reasons to be positive about Pace and one of those is the fact that the set-top box, as we know it, is evolving. I mean, no longer is it the situation where a set-top box basically turns a signal for television purposes. Nowadays set-top boxes are, sort of, I suppose, vehicles for multimedia interactive services as well as a digital recorder. Going forward, I can see this is going to move on to provider of internet services and they're going to become more and more integrated with phones, cameras and computers, that sort of thing.

Pace itself is a completely different animal these days. This is in comparison to what it was like before 2012. The company made three acquisitions last year.

This graphic here actually shows the impacts of these acquisitions. The revenues generated from 2Wire and Bewan are indicated in red and with the acquisition of Latens has added sort of the green sort of additions to revenue. 2Wire basically means that now Pace can offer set-top boxes which double up as broadband routers. Bewan is an IP gateway basically, a cable gateway. Latens is a software specialist which kind of shows that Pace is now looking to be recognised as more than just a hardware company. All three have added to the mix, so completely broadened the offering. Again, makes Pace more attractive.

This graphic also shows the fact that emerging markets are quite a big thing for the company as well. I mean no longer is it that Pace is so heavily reliant on one sort of company like BSkyB in the UK. It's far more diverse now. India is a massive territory. Egypt, Brazil, these are all quite sort of exciting areas for Pace.

You can see here that South America last year saw its revenue double which is again another key sort of attraction if third parties are looking at Pace.

I mean all in all, Pace is in a rapid growth area and its earnings and its sort of valuation in terms of it is valued at five times earnings at the moment... sorry, six times earnings at the moment - five times earnings next year. I think that the market is pricing it quite harsh.

The danger is that internet TV comes along and knocks pay TV off and therefore, taking with it demand for set-top boxes. But I think fears of this have been overcooked. In any event, if this does occur, Pace actually deals with companies who use internet TV as their preferred medium, so the company I think is able to adapt. The share price at the moment I think it's pricing in a dire situation which I do not think is going to transpire. If it persists, it's only a matter of time before someone like Cisco Systems, or any company looking to gain scale, comes knocking.

Thanks for watching. Make sure you tune in again next time.