xG Technology Inc (NASDAQ:XGTI) shot out of the gates on Monday, reaching early session highs just ahead of $5 – representing gains of more than 115%. We took a look at this one back in October, when the company started cashing in on its IMT subsidiary by way of a number of big ticket purchase agreements scored by the latter. At the time, we noted that the IMT deal was a bit of a frustrating one for shareholders, with the frustration rooted in a bit of underhand deal term shuffling. Basically, the deal turned out to be (potentially) a lot more dilutive that initially reported. This potential for dilution put pressure on price during the current and the previous quarter, and from an impact perspective, essentially negated a brushed over announcement of a company called Vislink Communication Systems.

The two entities had previously entered into a letter of intent (LOI) with one another, and this upgraded to a binding agreement mid to late October, but xG’s share price failed to really reflect (or perhaps more accurately, markets refused to recognize) the value in the acquisition.

Well, that deal just closed, and the value is finally being priced in. As mentioned, the company is up treble digits on its last week’s close, and volume looks as though it’s going to carry xG higher as we head into the middle of the week.

One thing worth mentioning before we get in to what the deal means. xG just effected a 1-for-10 reverse split (business close on Thursday, effective Friday) and this failed to really have the impact management had hoped for. Price initially rose towards the $4.20 mark, but declined sharply late Friday to close at just $2.30 – around 30% lower than the pre-split price. This is always a risk with splits of this nature, especially at this end of the market, but it’s never nice to take as a shareholder, even one who is familiar with the risks heading in.

Anyway, luckily, xG had the Vislink closing up its sleeve, and this has served to catalyze the upside action that management was trying to achieve with its capital structure reshuffle.

So with that out of the way, what does the Vislink acquisition mean for xG?

Well, Vislink is a company that specializes in what’s called scene to screen technology. Basically, it’s the recording of video which is simultaneously recorded and displayed through a wireless connection. This sports events, live television broadcasting, surveillance, that sort of thing. The company is established in its space and – and here’s the important thing – its present year sales run rate is expected to be between $45-$50 million. To offer some perspective here, xG’s current PPS values it at just $10 million.

We think that the Vislink acquisition is a very positive development for xG, given the synergies between the business models of xG’s IMT and Vislink. We expect the following:  that xG will go after Vislink’s current (and substantial) client base and attempt to cross sell IMT’s products as an enhancement to the services currently offered by Vislink. With up to $50 million in annual revenues coming in, this cross sell opportunity is a big one if the company can get it right, and that’s where we see the primary upside deriving from near to medium term.

As ever, there’s risk involved. Dilution has been and still is an issue, and xG is probably going to have to raise near term (read: even more dilution) if it wants to expand into the Vislink cross sell opportunity. It’s going to be a tough period for shareholders. Those that ride it out, however, could find themselves exposed to some pretty substantial upside when the company comes out at the other end of the tunnel.

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Disclosure: We have no position in XGTI and have not been compensated for this article.