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Riverstone Picks Up Pipal

The deal is done, and it looks to be all about Layer 2 Tunneling Protocol

January 3, 2003

3 Min Read
Riverstone Picks Up Pipal

Riverstone Networks Inc. (Nasdaq: RSTN) looks to be beefing up the IP services and broadband aggregation features of its routers with the recent acquisition of Pipal Systems (see Riverstone Completes Pipal Acquisition).

The deal marks Riverstone's first acquisition since it was spun out of Cabletron Systems Inc. (NYSE: CS) and went public.

The company announced the details of the acquisition of the 42-person Santa Clara, Calif., startup during its third-quarter earnings call in December (see Riverstone Slapped in Face of Good News). The deal will cost Riverstone 8 million shares of the company’s common stock and $3.5 million in cash. It also agreed to take on about $6.5 million in debt and $5.8 million in compensation and bonus arrangements for Pipal employees as part of the deal.

Riverstone has said little about what it plans to do with the technology, except to say that it will be using it to enhance its Multiprotocol Label Switching (MPLS) and Ethernet offerings.

A look at the startup’s lineage could provide some insight. Pipal was founded in 2001 by engineers from Nortel Networks Corp. (NYSE/Toronto: NT), Shasta Networks (which was acquired by Nortel), and Redback Networks Inc. (Nasdaq: RBAK). For the past two years, engineers from the company have been active in Internet Engineering Task Force (IETF) standards work, particularly in the development of Layer 2 Tunneling Protocol (L2TP) standards used to create Virtual Private Networks.

Riverstone already has a strong MPLS portfolio. It was one of the first vendors to offer support for Layer 2 MPLS VPNs based on the IETF's Martini Draft. It has also deployed the technology in several networks.

The addition of L2TP technology could strengthen its portfolio to more aggressively compete with market leaders like Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR), say analysts.

The addition of L2TP could also allow Riverstone to add broadband aggregation to its routers. This would put it head-to-head with Juniper’s ERX platform. Kevin Mitchell, an analyst with Infonetics Research Inc., says he wouldn’t be surprised if this were Riverstone’s strategy, given that the line between edge routers and IP service/broadband aggregation devices is blurring. Currently, Riverstone is optimized for the Ethernet market, but adding aggregation would allow it to expand into true edge routing, says Mitchell.

“To be an edge router player you need to support things like broadband aggregation,” he says. “Not all service providers will need all these features in every place of their network, but it is becoming an important item in their checklist.”

This looks to be gaining in importance, given that companies focused purely on IP services, such as Celox Networks and CoSine Communications Inc. (Nasdaq: COSN), have struggled as routers adopt their features (see ICT Picks Switch Management and Floridians Bid for CoSine ). More and more of this functionality will be incorporated into routers, says Mitchell.

Adding L2TP functionality would also help Riverstone compete against Cisco. Specifically, it would allow the company to provide an alternative to MPLS Layer 2 VPNs. Some carriers like Sprint Corp. (NYSE: FON) and Savvis Communications Corp. (Nasdaq: SVVS) have no plans to offer MPLS VPNs (see Sprint Spurns MPLS for Global VPNs). Cisco already offers a solution that can handle both MPLS Layer 2 VPNs as well as L2TP tunnels.

“It could expand their offering so they could compete more with Cisco,” says Irwin Lazar, an analyst with the Burton Group. “Even with all the hype surrounding MPLS, there are some carriers that have no interest in deploying it.”

Financial analysts have been moderately positive about the acquisition.

“It’s an interesting acquisition if it really enhances the technology,” said Reginal King, an analyst with W.R. Hambrecht & Co., when the acquisition was first announced. “They’ve got the cash, and they didn’t pay much for it. So I don’t think it’s a bad thing.”

— Marguerite Reardon, Senior Editor, Light Reading

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