Extreme Spins In Optranet

Extreme is buying out its pet project, Optranet. Investors ask: why?

January 2, 2001

3 Min Read
Extreme Spins In Optranet

Extreme Networks Inc. (Nasdaq: EXTR), a company that makes Layer 3 Ethernet switching gear, started the New Year with a thud. This morning (Tuesday) it announced that it had bought stealthy startup Optranet for 2 million shares of Extreme stock -- then refused to tell anybody why it did the deal (see Extreme Acquires Optranet).

"We're in a quiet period right now," says Gordon Stitt, Extreme's CEO. "It's not the right time to talk about our future strategy." Investors responded by sending the company’s stock down about 27 percent to $28 a share, decreasing the value of the deal from roughly $78 million to about $56 million. Nasdaq's 7 percent decline on the day did not help matters.

Optranet, which officially launched last January, received less than 20 percent of its $6.7 million in funding from Extreme. That makes Optranet a “spin-in” -- a startup bought by the company that funded it. The two companies have been working closely throughout the year, sharing licenses for development, says Stitt.

But the history between the two companies goes back even further. Optranet’s CEO Darrel Scherbarth was VP of engineering at Network Peripherals, the company founded by Stitt prior to Extreme. Other key engineering executives at Extreme came from Network Peripheral. Stephen Haddock, Extreme's VP and CTO, was Network Peripheral's chief engineer, and Herb Schneider, Extreme’s current VP of engineering, was engineering manager.

So what is Extreme getting out of this deal?

That’s the question of the day. According to a vague description on its Website, Optranet claims to be developing a hardware product geared toward the multitenant unit market. Some analysts have speculated that the company is targeting the digital subscriber and service provisioning, putting it head-to-head with companies like Tut Systems Inc. and Elastic Networks. But neither Extreme nor Optranet is talking publicly about specifics.

"This is a competitive business," says Stitt. "Optranet's site is vague on purpose. We don’t want our strategy widely available to our competitors. To assume there is nothing there because we haven't gone into detail is wrong. There are a lot of reasons we made the investment, and they will become obvious in the next couple of weeks."

More than products or technology, the biggest asset that Extreme gains from the deal seems to be the company's engineers. Optranet has about 50 employees, the vast majority of whom are engineers. This is a considerable boost to Extreme's engineering team, which at last count in September had roughly 120 to 140 engineers on staff.

Extreme has been working hard to shed its enterprise switching persona and transform itself into a service provider equipment company. Over the last year, it has marketed its current family of switches for use in service provider networks. And it has announced a new product line called Alpine for use in the metropolitan area network (see Extreme Launches A Sonet Killer).

Despite such efforts, the company hasn’t been able to get beyond simple Layer 3 switching, according to some analysts.

"The Extreme boxes weren’t built around services,” says Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading. "They are used by service providers to provide Layer 3 switching from one point to the next. They don’t have service intelligence built in, and they don’t offer much in the way of provisioning."Extreme expects to close the deal by January 31, 2001, and it will provide more information on the acquisition on or before its investor conference on January 17.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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