The merger between Tellium Inc. (Nasdaq: TELM) and Zhone Technologies Inc. wasn't just about Tellium's cash, executives at both companies say. Instead, the deal came about largely thanks to a new metro product that Tellium has been building for the last several months (see Zhone Cashes In on Tellium).

“I’d be a fool to say the cash wasn’t attractive,” says Zhone CEO Mory Ejabat. “But cash by itself is not a reason to merge with another company. I can raise cash anytime I want.”

At first glance, the two companies seem an unlikely match. Tellium makes core optical switches, while Zhone has a portfolio filled with access products. But Tellium CEO Harry Carr, says his company's new product will bridge the gap between its core switch and Zhone’s access gear.

“I admit the strategic fit isn’t obvious,” Carr says. While Carr won't discuss the new product's details, he did say it is far enough along that carriers are starting to test it. He adds that Tellium is in talks with Cable & Wireless (NYSE: CWP) regarding the new product.

"I think that if we didn’t have that product line, Mory would not have been as excited about this deal.”

"Hopefully, there’s some truth to what Harry is saying," says Tellium-watcher Michael Howard, principal analyst and a founder of Infonetics Research Inc. “They’ve got the core and the access. It’s the metro that’s missing." Howard says he had not previously heard about Tellium’s metro network plans.

Many of Tellium’s optical switching competitors have acquired or developed metro networking products. Some of them are even moving toward filling out a portfolio with Layer 2 and Layer 3 gear.

Ciena Corp. (Nasdaq: CIEN), Tellium’s closest rival, has the MetroDirector K2 it acquired from Cyras (see Ciena's K2: What Problems?). Ciena also recently bought WaveSmith -- with its Layer 2 edge switch, also positioned for the metro market (see Ciena Nabs WaveSmith) -- and the firm is reportedly interested in Catena Networks Inc. (see Ciena May Be Eyeing Catena).

Other companies are also focusing on the metro. Alcatel SA (NYSE: ALA; Paris: CGEP:PA), a big player in the Sonet add/drop multiplexing market, bought TiMetra, an edge routing company (see Alcatel & TiMetra Seal the Deal). Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) bought the MPLS switch routing startup, Vivace (see Tellabs Snags Vivace for $135M). Larger companies like Nortel Networks Corp. (NYSE/Toronto: NT) and Siemens AG (NYSE: SI; Frankfurt: SIE) are often rumored to be looking for metro startup acquisitions.

While Carr and Ejabat say the new products are the driving force behind the merger, Tellium’s $150 million in cash certainly doesn't hurt. Zhone, which began life with $500 million in venture funding, reported $1.9 million in cash at the end of the second quarter of 2003. The company has already used $10 million of a $25 million line of a bank credit. In total, Ejabat says the company has about $45 million of debt.

— Marguerite Reardon, Senior Editor, Light Reading