Light Reading

ECI to Buy Laurel for $88M

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Supercomm News Analysis
Light Reading
5/16/2005
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ECI Telecom Ltd. (Nasdaq/NM: ECIL) is to buy B-RAS vendor Laurel Networks Inc. for $88 million in cash (see ECI Buys Laurel Networks).

Today's announcement follows months of negotiations that Light Reading believes were concluded early last week (see ECI Closing in on Laurel). The deal, expected to close within a few weeks, brings Laurel's technology, 150 staff, and $9 million in cash, giving the deal a $79 million net worth.

That's just more than four times Laurel's 2004 revenues of $18 million, derived from customers such as Level 3 Communications Inc. (Nasdaq: LVLT) and Korean carriers Dacom Corp. and KT Corp. (Korea Telecom), among others (see Laurel Scores at Level 3, Laurel Dates Dacom, Laurel Wraps Up KT Deal, and Laurel Lands Grande Deal ).

The move also represents ECI's latest attempt to challenge the industry's larger vendors. The company knows it needs to ramp up its IP capabilities if it is to win large carrier deals in competition with the likes of Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), Huawei Technologies Co. Ltd., and Siemens Communications Group, and has been vocal about its plans to acquire additional capabilities (see ECI Lines Up Acquisitions).

Late last year ECI invested in core IP router vendor Chiaro Networks Inc., and a full takeover looks likely (see Chiaro Lands ECI Investment). The acquisition of Laurel will give ECI an edge router with broadband remote access server (B-RAS) capabilities it can offer in conjunction with its Hi-Focus multiservice access gateway (see Laurel Joins B-RAS Pack, Laurel Steps Up on the Edge, and ECI Extends Broadband Access Portfolio). In addition, Laurel has recently been promoting its technology as video-friendly in an effort to attract carriers looking to provide IP video and IPTV services (see Laurel Pumps Up IPTV Plans). That will fit neatly into ECI's plans to target operators planning triple-play (voice, video, and data) service bundles.

ECI executives weren't immediately available to talk about the acquisition or about where else ECI might turn its M&A attentions. The company will hold a conference call regarding the Laurel acquisition at 3pm Eastern Standard Time (EST).

The deal appears to have come just in time for Laurel, which has only $9 million left in the bank. Without the acquisition, it could have ended up on the B-RAS scrapheap, or been bought for peanuts -- a fate that has befallen several other B-RAS players (see Tut to Acquire Copper Mountain and Tut's CoSine Deal Drags On).

That situation will likely have helped ECI broker a price that falls below Laurel's total funding to date, and is much lower than the $200 million-plus that some VCs had predicted. Laurel has raised $118 million in backing, including funds from venture capitalists and equipment vendor Ciena Corp. (Nasdaq: CIEN), which has been reselling Laurel's gear (see Ciena Takes Stake in Laurel and Ciena, Laurel Win in Spain).

Investors and carriers will want to know what will come of that relationship, and Laurel's current partnership with Marconi Corp. plc (Nasdaq: MRCIY; London: MONI), a head-to-head rival of ECI in the optical and access markets (see Laurel & Marconi Make It Official).

Heavy Reading analyst at large Graham Beniston believes there's little downside to this deal, and that ECI is acquiring a company with "very creditable technology. It leads many of the other B-RAS vendors in terms of scaleability." Adds Beniston, "This gives ECI a solution set to challenge the Marconis of this world."

— Ray Le Maistre, International News Editor, Light Reading

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reoptic
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reoptic,
User Rank: Light Beer
12/5/2012 | 3:15:01 AM
re: ECI to Buy Laurel for $88M
This is a good move for both companies. ECI picks up one of two available edge router/BRAS players for price much cheaper than Redback alternative. Laurel gets a channel it badly needs and a fair post bubble price. VCs don't get good returns on this one but they don't get a hole in the ground either which would be much worse. Just shows you that building a systems company is a high risk/low reward endeavor nowadays.
fiber_r_us
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fiber_r_us,
User Rank: Light Beer
12/5/2012 | 3:14:58 AM
re: ECI to Buy Laurel for $88M
If the employees leave, why would the purchase be a good thing for ECI... They would be left with an unsupportable product.
fiber_r_us
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fiber_r_us,
User Rank: Light Beer
12/5/2012 | 3:14:58 AM
re: ECI to Buy Laurel for $88M
I would think the employees basically got screwed here... Their options wouldn't be worth anything. So, all they can say is "I still have a job"! Look for resumes to hit the streets.
geof hollingsworth
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geof hollingsworth,
User Rank: Light Beer
12/5/2012 | 3:14:58 AM
re: ECI to Buy Laurel for $88M
Given that the sale price is less than the money invested in Laurel, and management will certainly be getting part of the proceeds, wouldn't it be more like a "high risk, NO return" business?
5urf5hop
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5urf5hop,
User Rank: Light Beer
12/5/2012 | 3:14:57 AM
re: ECI to Buy Laurel for $88M
>I doubt ECI was so stupid to screw the common >shares, because $88M would have been more than >enough to start an inhouse effort from scratch.

Really?

Just ask the ex-Procket folks. Both common and preferred got screwed. And yes, many are walking ...
Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 3:14:57 AM
re: ECI to Buy Laurel for $88M
Just ask the ex-Procket folks. Both common and preferred got screwed. And yes, many are walking ...

Dismembering Procket was a great move by Cisco. They bought only the software portion (which was a lower price than the hardware side or the combined entity) and they took a bunch of talented software guys off the competitive market for a while.

I really doubt csco wanted to make Procket work, since the purchase occured during the same month as the CRS announcement.

And yes, screwing the common there was exactly what was required for complete dismemberment.
Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 3:14:57 AM
re: ECI to Buy Laurel for $88M

I would think the employees basically got screwed here... Their options wouldn't be worth anything.

You're right, they'd just walk, or get lazy.

I have NEVER seen a deal that screwed the common EVER pay off for the aquirer. Not one. Even dumping the managers and handing out incentives rarely works, because you are left with the hallow shell of what used to be a team.

I doubt ECI was so stupid to screw the common shares, because $88M would have been more than enough to start an inhouse effort from scratch.

lightreceding
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lightreceding,
User Rank: Light Beer
12/5/2012 | 3:14:40 AM
re: ECI to Buy Laurel for $88M
putting the resume out there and getting another job is not so easy. The street is flooded with resumes. If it was easy to move on Redback would be vacant, as they all got screwed during the refinancing. The employees are still there just for the job. In any case this seems to be a good move for ECI. They get Laurel cheap and add to their portfolio. They do need to focus on keeping people movtivated at Laurel. But that is obvious.
DPD
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DPD,
User Rank: Light Beer
12/5/2012 | 3:14:36 AM
re: ECI to Buy Laurel for $88M
If it was easy to move on Redback would be vacant, as they all got screwed during the refinancing. The employees are still there just for the job.

What makes you an expert on the majority of employees at Redback? How do you what they do and don't want? Maybe they like it there. Maybe the company repriced their options. You shouldn't make blanket statements like that without data.
lightreceding
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lightreceding,
User Rank: Light Beer
12/5/2012 | 3:14:36 AM
re: ECI to Buy Laurel for $88M
How do you know that I don't have data?
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