Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) said Friday it will be acquiring optical crossconnect startup Ocular Networks Inc. for about $300 million in cash and about $55 million in stock options.

The deal makes sense, as Tellabs is actively pursuing next-generation technology, and Ocular needs the kind of sales access that Tellabs has into existing incumbent carrier accounts. During a conference call Friday, Tellabs President and CEO Dick Notebaert called the deal "a logical extension of [Tellabs'] business."

Ocular already has contracts in place and trials ongoing with IXCs and ILECs, says Ocular CEO Ed Kennedy. The company has been booking revenues from its product for about six months now, says a source close to the deal.

The Ocular product combines a multiplexer, a digital crossconnect, and a Layer 2 data switch. It's mostly known for its density: It allows carriers to cram lots and lots of Sonet virtual paths -- connections for an end-to-end route between two points -- into a small physical space within a tier 2 or tier 3 central office.Complementary to Ocular's product is Tellabs' Titan 5500 product, of which there are 3,500 systems installed in carrier networks. The aptly named Titan aggregates and connects DS3, DS1, and STS1 connections in the largest carrier central offices. In some cases, the Ocular product and the Titan 5500 might work side by side, using the Ocular box as an offload for high-speed optical ports.

Tellabs' managers say they expect the Ocular acquisition to generate $50 million to $100 million during 2002, much of that coming in the fourth quarter. Ocular executives cited the company's burn rate at between $2 million and $2.5 million a month.

Sources familiar with the deal say that Ocular was also being courted by some other large players, including Ciena Corp. (Nasdaq: CIEN). It's unclear how far such talks may have gone or whether there were any bidding wars.

Tellabs has struggled with internal development of next-generation products, and it's now apparent that the company has chosen to go the acquisition route instead. It recently shut down work on some of its optical networking products, including the Titan 6700 (see Tellabs Pulls a Switch). In addition, it has been losing momentum with its older crossconnect product, the Titan 5500 (see Tellabs Losing Its Edge?).

The acquisition shows that in a difficult economic environment with a venture-capital funding crunch, startups are being pressured to look to larger partners with sales channels in order to bring their products to market. In Ocular's case, it had raised $50 million in funding since its founding in 1999, and insiders say it wasn't shopping itself when Tellabs came calling.

"It was far from a fire-sale," says Sean Dalton, a partner at Highland Capital Partners (HCP), one of Ocular's early investors. "If management had wanted to keep going [as an independent], we would have loved to have poured a lot more money into the company."

Ocular's other investors include Bessemer Venture Partners, Columbia Capital, and Jafco Ventures.



It's not yet known how many of Ocular's 160 employees will remain at Tellabs. Tellabs' Notebaert left the attrition question wide open during the conference call. "It is our intention to retain the key resources of this acquisition," he says.

The deal, which is subject to regulatory approval, is expected to close in first quarter 2002.

Just after midday Friday, Tellabs shares were down 0.17 (1.10%) to 15.33.

— R. Scott Raynovich, Executive Editor, with Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com