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?).
"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