x
Cable/Video

M&A Whispers Continue

More than ever, M&A activity is becoming shorthand for "hope" in the telecom market.

Mergers and acquisitions appear to be the only likely path to liquidity for venture-backed companies hoping to survive. Likewise, public companies hoping to make inroads into the few remaining incumbent carriers may also consider combining with rivals or vendors with complementary products.

So where are all the deals?

Industry watchers say several companies may have their scouts doing some footwork, and rumors of talks abound. It's a buyer's market and valuations are low, they say. At the same time, many large equipment companies have cut research and development to the bone while taking down their operation costs, so there are probably holes in their portfolios.

But service providers haven't clearly mapped out where they're going, as far as next-generation networks are concerned, says Robert Abbe, a managing director at Broadview International, the Silicon Valley M&A advisory: "They're waiting and they're watching... but until the service providers make decisions, equipment vendors are going to let their customers sift through the, say, six core router startups that are vying to be number three [in the market] behind Cisco Systems Inc. and Juniper Networks Inc."

Also, the fact that there isn't much buying activity from service providers gives incumbent equipment vendors time to build products that they might've had to buy in headier days.

The M&A market has been waiting a catalyst for a while. In 2002, 325 venture-backed companies were acquired or merged for a total of $9.7 billion, according to VentureOne. Compared with 2001, venture-backed M&A volume dropped 17 percent and the amount paid in those transactions plummeted 55 percent.

So while the market looks to service provider and -- in some cases -- enterprise spending for direction, several companies loom large with ample amounts of cash to keep themselves afloat and, when the time is right, to acquire. A few such companies include:

  • Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI): AFC's cash and marketable securities totaled $965 million as of September 30, 2002, and, judging by two of its major product announcements in 2002, the company believes in harnessing startup technology to improve its products and attack new markets (see AFC Stokes Up Startups).
  • Cisco: Cisco remains the cash champ, with cash and total investments of $21.2 billion, and it continues to buy and invest in smaller companies (see Cisco Buys Psionic).

  • Intel Corp. (Nasdaq: INTC): Intel, like Cisco, has an enormous amount of money, with $10.9 billion in cash and investments as of October 2002. The company still frequently invests in and buys optical components startups (see Intel Invests in Optical Solutions ).
  • Sycamore Networks Inc. (Nasdaq: SCMR): Sycamore has $1.02 billion in cash and investments and, being that it trades at a market capitalization of $820.9 million, the company could conceivably be either a suitor or a target (see Is Sycamore Startup Hunting?).
  • Corvis Corp. (Nasdaq: CORV): Corvis has $548.7 million in cash and investments and appears content to bide its time until the long-haul market comes swinging back. And, as it did with the Dorsal Networks buy, it has taken advantage of a slow market to add to its product portfolio (see Corvis Dorsal Deal: A Huber Spin-In?).
Preempting some acquisitions will be investment and distribution deals between vendors that eventually end up in a marriage, analysts say. AFC's investment in, partnership with, and, later, its acquisition of AccessLan is a relatively recent example of such premarital sampling (see AFC Goes Multiservice).

"This will be another tough year for M&A exits," Abbe says. But he adds that late-stage private companies and smaller public companies aren't going to see the number of end customers change, so they either have to pick a partner or get off the dance floor.

"Ultimately, M&A has to happen as the service providers make decisions on new network architectures and new equipment."

— Phil Harvey, Senior Editor, Light Reading
www.lightreading.com
Page 1 / 13   >   >>
BobbyMax 12/5/2012 | 12:54:49 AM
re: M&A Whispers Continue The merger and acquisition of start-up companies is full of dangers for the larger companies. We have seen what Ascend Comunications and Alteon did to Lucent and Nortel, respectively. one has to be careful in acquiring and merging with the California companies. California, like any other third world country, cannot be trusted with its products and tecnlogies.

If acquisition becomes absolutely vital, then a proven company with sales revenue should be considered.

VCs like their start-ups to be acquired by another compamy. They engage in very heavy handed techniues to sell their companies. This includes product and technogy misreprentaions, total revenue information, and total market size of the product. Very few companies have profited by acquiring companies.

Company CEOs who do not have any accomplishments also engage in Merger and Acquisition activities in order to secure their jobs. For example, in some large companies such as HP and Compaq, the merger and integration can easily take 2-3 years.
willywilson 12/5/2012 | 12:54:44 AM
re: M&A Whispers Continue The merger and acquisition of start-up companies is full of dangers for the larger companies. We have seen what Ascend Comunications and Alteon did to Lucent and Nortel, respectively. one has to be careful in acquiring and merging with the California companies. California, like any other third world country, cannot be trusted with its products and tecnlogies.

If acquisition becomes absolutely vital, then a proven company with sales revenue should be considered.

VCs like their start-ups to be acquired by another compamy. They engage in very heavy handed techniues to sell their companies. This includes product and technogy misreprentaions, total revenue information, and total market size of the product. Very few companies have profited by acquiring companies.

Company CEOs who do not have any accomplishments also engage in Merger and Acquisition activities in order to secure their jobs. For example, in some large companies such as HP and Compaq, the merger and integration can easily take 2-3 years.


Well said, Bobby, very well said. Especially the part about "California and other third world countries." So true.
hyperunner 12/5/2012 | 12:54:43 AM
re: M&A Whispers Continue Wow, I hate to find myself agreeing with BobbyMax, but errrr...he's right.

I've got some very funny memories of suppliers giving presentations about the wonderful new company they bought for it's amazing technology, and then a year down the road seeing that product drop out of the roadmaps.

But is the situation different during a spending freeze? Let's face it, we all know that products from startups are just a box of bugs waiting to bite. But in a boom period, the startup product (for which the acquiring company will have paid way too much) is expected to contribute towards revenues in a very short timescale. The guys from the startup can never actually admit that they sold a pup, and so they continue to pretend the box is ready for FCS. Then when the acquiring company's QA department finds out that the box crashes when it receives a PING packet, or catches fire if you leave it switched on for more than 2 hours, the excrement hits the ventilator. But at that point you find that anyone who actually knew how the box worked (or could remember where they saved the latest build code) has cashed in their options and left to join a new startup.

In a recession, maybe there's no longer an expectation of immediate product revenues, and so there's more time to try and fix the product. Also, since the shares in the acquiring company are worthless, the people who designed the box don't have an escape route, and will have to stick around to help fix it.

Just a thought.

hR.
the_lord 12/5/2012 | 12:54:42 AM
re: M&A Whispers Continue WRONG!!!!

Fundamentally, "acquisition and development" is the right approach for the large system vendors. That is, all major new platform development should be done by the VC industry with the large system vendors integrating the product into their string of pearls.

The reasons are simple:

o Tangible products can be viewed by the system vendor before making financial commitments. Customer commitments can be more easily aniticipated. Years ago, a blue sky idea would be presented to a product committee who would then bare all of the risk through development.

o Customer predictions for large vendor are 6mos to 1year from the point of acquisition. Under the old way, product development would consume 2-3 years of development. Then, maybe there would be customer. The risk is all borne by the VC.

o Survival of a product during development was based on perception and politics. With the VC community, politics is still there but it is the responsibility of the VCs toward their investor to ensure that the wrong ideas are not founded.

o In times like these, the vendor can choose among many hard fighting competitors for the right products.

The acquisition problems of XROS, Ascend, Qtera, etc were not those being acquisitioned but of those acquiring. Simply, the Nortel, LU, and Alcatels rushed to buy companies at exorbitant prices without making an intelligent business case. The irresponsibility in the upper management was incompetent if not felonious.

When purchasing a company, these people should be asking simple questions:

o How far off until revenues? (6mos to 1 year)
o How much does this company cost?
o How does it fit into my current product line?
o Does it help sell more of my other products, or prevent loss of business to a competitor?
o Can the technology be shared with other parts of the company? Remember the old company development will have an NIH attitude towards new technology. No one likes a new little darling baby.

Just some thoughts!!!!
pdt 12/5/2012 | 12:54:41 AM
re: M&A Whispers Continue I think we will see partnership coming between big vendors in this year.

I think Lucent has cut too much out of it's portfolio to offer now full solution. This is just one example. Same is true for Nortel already and I think same will be true for Alcatel.

These vendors will be looking for partnership with manufacturers of point products like ATM switch and BRAS. Not acquisition, but OEM agreement. If OEM agreement works, maybe then acquisition.

My prediction is Lucent is first big player to move this way. Deregulation of RBOCS will trigger buying surge, but Lucent cancelled its ATM switch and now cancelled Nexabit (which is not ATM switch anyway). Lucent will make a deal with Wavesmith or Equipe, but maybe they don't like to <<reward>> former Ascend people at Equipe who already took a lot of Lucent money. So then maybe they will make deal with Marconi who have some very good ATM switch.</reward>
PresterJohn 12/5/2012 | 12:54:39 AM
re: M&A Whispers Continue "WRONG!!!!

Fundamentally, "acquisition and development" is the right approach for the large system vendors. That is, all major new platform development should be done by the VC industry with the large system vendors integrating the product into their string of pearls. "

You've parroted the start-up/VC party line here, but how do you explain the fact that it hasn't reflected the reality we've all witnessed over the last 5 years? Most all acquisitions of start-ups have been utter failures, except, of course, for the upper management and VC enablers of said start-ups.

Which VC firm do you work for?
fiber_r_us 12/5/2012 | 12:54:38 AM
re: M&A Whispers Continue What good is a distressed sale of a systems company? No employees to support the product means there is no product. I could see where a component company might be worth something as a distressed asset (you *should* be able to produce a component with just the IP). But, building and supporting a *system* without the people who originally designed it and wrote the code sounds like an excersize in futility.

Is anyone aware of *any* systems startup company that was bought for assets only where the product went on to be sold to customers successfully?
billy_fold 12/5/2012 | 12:54:38 AM
re: M&A Whispers Continue I dunno, but the Lightera (CoreDirector) acquisition by CIENA and the Cerent (15454) acquisition by Cisco seem to be generating some revenue for those companies. It may be wrong to assume that all M&A activity is bad.

-billy
BlueWater66 12/5/2012 | 12:54:38 AM
re: M&A Whispers Continue IGÇÖm not sure your actually going to see too many real GÇ£AcquisitionsGÇ¥ in 2003. Right now we're mostly seeing "Distressed Sales", which are very different than a real acquisition. These are asset only purchases. The VCs loose most or all of their investment and the employees get almost nothing (usually no return on options, very little severance, and a small percentage of employees get a job with the new firm). This is basically a bankruptcy wrapped up to look pretty. Companies like Alvesta and Cielo are examples. It is terrible. The acquiring companies can get the assets for a couple hundred thousand dollars, and may or may not do anything with the technology (but it is cheap). The investment banks also donGÇÖt make any money off these. These deals are so desperate, that there really isnGÇÖt much game playing. The buyer has all the power and they force full disclosure.
fiber_r_us 12/5/2012 | 12:54:37 AM
re: M&A Whispers Continue >What about that next generation SONET box that
>Alcatel bought about 18 months ago???

Anybody know what company this was?
Page 1 / 13   >   >>
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE