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ECI Goes Back to the Future

Light Reading
News Analysis
Light Reading
2/21/2003

ECI Telecom Ltd. (Nasdaq/NM: ECIL) has called for the biggest "do over" in quite some time. A little more than two years after it reorganized to take advantage of the telecom boom, the Israeli equipment maker has nearly undone years of spinoff preparation and gone back to the model of one large vendor, rather than five small ones that report to a holding company.

"The initial idea was to go public with standalone companies," says Emanuel Nachum, former president of Lightscape Networks Ltd. North America. "We realized that this will not happen soon and what our customers really want to see is a stable company; and that's what we're trying to create."

In August 2000, ECI began divvying up its business into five separately managed companies: Lightscape Networks Ltd., a metro transport gear maker; Inovia Telecoms Ltd., a broadband access gear maker; Enavis Networks Ltd., a maker of crossconnects and switches; ECI Telecom-NGTS Ltd. (NGTS), an IP telephony company; and InnoWave ECI Wireless Systems Ltd. (InnoWave), a vendor of wireless access solutions for the local loop.

While each company had its technological chops, the bottom line is that ECI positioned itself for a telecom recession with five different, new brands. It turned out that the subsidiaries had a hard time breaking into North America (see Lightscape Looks West ). Towards the end of last year, ECI began to unravel its plan after it became clear that the only thing gained from running five different equipment companies under one umbrella was that it was harder to keep everyone out of the rain.

The first thing ECI did was combine NGTS with NexVerse Networks, a venture-backed startup that rose from the ashes of ipVerse, another venture-backed startup. The two companies formed Veraz Networks and closed $30 million in financing from ECI Telecom, Argonaut Private Equity Management LLC, Battery Ventures, Kleiner Perkins Caufield & Byers, Levensohn Capital Management LLC, and Norwest Venture Partners (see ECI, NexVerse Become Veraz). ECI now owns 36 percent of Veraz on a fully diluted basis.

After shedding NGTS, ECI sold InnoWave to Alvarion Ltd. for about $20 million in cash (see ECI Telecom to Sell InnoWave). As part of the deal, ECI was given warrants to buy 200,000 Alvarion shares over a five-year period.

What remains will fall under the now considerably smaller ECI umbrella. ECI's new Lightscape Optical Networks Division will include the remnants of Lightscape and Enavis. And Inovia will become ECI's Inovia Broadband Access Division.

To complete the reshuffling, ECI named Ruben Markus, former CEO of Enavis Networks, as its new executive VP for sales, marketing, strategy, and business development. Eran Dariel remains the general manager of the Lightscape division; Pinny Chaviv is the general manager of the Inovia division. Along with Giora Bitan, ECI's chief financial officer, these executive VPs will all report to Doron Inbar, ECI's president and CEO.

Nachum says he's not sure what his new title will be. "We're still working on definition of the organization in North America," he says. ECI hopes that after all this self-surgery it will be right back where it started -- a formidable, medium-sized equipment company duking it out all over the world with the likes of Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Nortel Networks Corp. (NYSE/Toronto: NT), and Ciena Corp. (Nasdaq: CIEN). "We want to have one face to the customer with a much larger support organization," Nachum says.

ECI's revenues for the fourth quarter of 2002 were $149 million, and Lightscape's revenues alone were $41 million. ECI said it expects revenues in its core businesses – Lightscape and Inovia -- to decline 10 percent sequentially, as it aims to keep lowering expenses. ECI won't give its headcount, but reports abound that it continues to cut staff as it consolidates (see Headcount: Miller's Oranges).

The company's revenues for all of 2002 were $646 million, down from the $891 million in revenues reported in 2001, which included $45.5 million from the sale of ECI's Business Systems unit (see ECI Telecom Reports Q4).

— Phil Harvey, Senior Editor, Light Reading

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