Lucent Gets Riverstoned

The struggles of Riverstone Networks Inc. (OTC: RSTN.PK) might finally be ending, as Lucent Technologies Inc. (NYSE: LU) has signed a deal to essentially buy the company for $170 million in cash.

The deal, announced today, hinges on Riverstone filing a voluntary petition for Chapter 11 bankruptcy protection. Once that's done, the company would put its assets up for auction. (See Riverstone Sells Assets.)

Lucent has made what's called a stalking-horse bid, having already signed a purchase agreement to pay $170 million for Riverstone's assets -- including products, technology, and buildings -- at that auction. It's possible that someone else could step in with a larger bid, although that appears unlikely. The setup gives Riverstone a guaranteed minimum price.

All of Riverstone's 400 employees are expected to join Lucent.

Riverstone's press release notes the company has enough cash to continue operations but is doing the bankruptcy dance to take advantage of Provision 363 of Chapter 11 of the U.S. Bankruptcy Code, which allows for this kind of auction. "We're just able to complete the sale faster than we would have otherwise," a Riverstone spokeswoman says.

Riverstone officials were not available before deadline to elaborate on that statement.

The news sent Riverstone stock skyrocketing, up 43 cents (81%) to a whopping 96 cents. That gives the Riverstone juggernaut a market capitalization of around $125 million.

Lucent, which has been reselling Riverstone equipment, would pick up a line of Ethernet boxes that Riverstone says are crafted for carrier networks. Riverstone's flagship box is the 15008 router; its most recently released products include access routers for Ethernet and MPLS. (See Lucent Adds Riverstone to Roster and Riverstone Aims for Access.)

That could be a milestone for Lucent as the carrier Ethernet market continues to heat up. "This fills an important gap in Lucent’s portfolio and likely will give the company a No. 3 market share position when the acquisition closes in mid-2006," says Heavy Reading analyst Stan Hubbard.

So, is the deal worth it? Who knows? Riverstone hasn't filed formal quarterly earnings statements for the past several quarters, leaving its financial situation murky.

The company has also worked under the shadow of an SEC investigation since April 2003 and has had to restate earnings for 2003 and 2004, in the process undergoing an audit that's delayed the earnings filings for all of 2005. Riverstone, already in financial trouble, sacked most of its senior staff and began reinventing itself as a carrier Ethernet specialist. (See SEC Calls on Riverstone, Riverstone Founders Resign, Riverstone Misses SEC Deadlines, and Riverstone Begins New Chapter.)

That whole nightmare might finally be ending. Alongside the Lucent deal, Riverstone announced today that the SEC is considering a settlement with the company. (See Riverstone Gives Status.)

Riverstone was almost certainly losing money; it's just a question of how much. In November, the company said its break-even point had lowered to $30 million in revenues per quarter; at the same time, the company estimated it had shipped $16.1 million in hardware. (See Riverstone Claims Progress.)

Sources in the financial community have long assumed Riverstone would get bought out, with Lucent mentioned as a buyer multiple times last year -- but many believed Riverstone's absent financial reports were stalling any potential deals.

Heavy Reading analyst Rick Thompson, in his December 2005 report, "IP Video and the New Broadband Edge," noted that Riverstone, as a standalone, was not long for this world: "Riverstone is running on early success with carrier Ethernet, based on older RS-series products. It is continuing to get squeezed by the top players and cannot stand alone (and grow meaningfully) for more than the next year or two. Riverstone may need to be acquired or risk being systematically dismantled by stronger competitors."

It's worth noting that Lucent's buyout would not include Riverstone's cash or debt. The company reportedly has quite a bit of both. Its last 10-Q filing with the SEC, for the period ending November 2003, says Riverstone had $329 million in assets, $165 million of that in cash and short-term investments -- but much of that came from the November 2001 sale of $150 million in bonds that come due in December 2006. (See Riverstone Offers Notes.)

Assuming the deal goes through, Riverstone will wrap up its books by paying off its bonds, its $66 million in remaining debt, then it would disperse the leftover cash to shareholders.

— Craig Matsumoto, Senior Editor, Light Reading