Kestrel Takes Another Turn

The deal with Teon is off and the company is going to shrink its technology to sell as a subsystem

August 17, 2001

3 Min Read
Kestrel Takes Another Turn

Kestrel Solutions Inc. is changing directions -- again (see Kestrel Quietly Reconfigures).

Two months after it announced it would be acquiring the small seven-person startup Teon Optical Networks, the deal has been canceled (see Kestrel to Acquire TeON), says a source close to the company who asked to remain unnamed. Kestrel is supposedly abandoning its development of the TalonMX, a metro FDM (frequency-division multiplexing) transport product, and instead is working to shrink the technology to target the subsystem market.

According to the source, the Teon deal was called off about two weeks ago, after a month and a half of stagnant negotiations with Teon’s parent company Milcom Technologies and its technology partner Lockheed Martin Corp. When contacted by Light Reading, a Kestrel spokesperson refused to comment on any developments at the company. Milcom executives had not returned phone calls before press time.

While Kestrel may have lost Teon’s technology, it ended up keeping Martin Kaplan, the former CEO of Teon who had been appointed CEO of Kestrel after the merger was announced. Kaplan was formerly chief technology officer at Sprint Corp. (NYSE: FON) and before that worked at WorldCom Inc. (Nasdaq: WCOM). He is viewed as a key piece to Kestrel’s new restructuring. He was instrumental in developing a relationship with SBC Communications Inc. (NYSE: SBC), which had been testing the Talon product for months.

Originally, Kestrel positioned its FDM technology head-to-head against DWDM technology, saying that it was a cheaper solution for the metro network. FDM crams multiple streams of traffic into a single optical wavelength, reducing the cost of the system. Because FDM can use lower-grade fiber and a single laser, it can lower the costs of optical networks. DWDM uses multiple lasers to cram multiple wavelengths into a single, higher-quality optical fiber strand.

But Kestrel was fighting an uphill battle. DWDM had already been proven in the long-haul carrier market, and prices fell dramatically as DWDM component companies developed cheaper lasers and wider channel spacing.

“Kestrel was busy pushing the envelope on the technology, when the market was clearly focusing on cost,” says David Gross, a senior analyst with Communications Industry Researchers Inc. (CIR)

In more recent marketing efforts the company has tried to bring out the synergies between FDM and DWDM. But Gross says those efforts have also not gotten much traction.

Now, instead of building and selling large systems, Kestrel is said to be adapting the FDM technology for use in a subsystem product which could be sold to companies like Nortel Networks Corp. (NYSE/Toronto: NT), Ciena Corp. (Nasdaq: CIEN), or ONI Systems Inc. (Nasdaq: ONIS, all of which are making metro DWDM gear.

“This seems like a very sensible strategy,” says CIR's Gross. “Service providers are usually hesitant to use a proprietary technology from a startup. But FDM has some benefits, and I think if it comes in a Nortel or a Ciena product it’s much more sellable to carriers as part of a total solution.”

The big question now is whether or not the company has the resources for another attempt at refocusing its strategy. Sources close to the company says it still has about $80 million of the $187 million it had raised from venture capitalists. Layoffs have reduced the company headcount to about 100 people.

- Marguerite Reardon, Senior Editor, Light Reading

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