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Zhone Cashes In on Tellium

Zhone Technologies Inc. has agreed to buy 60 percent of publicly traded Tellium Inc. (Nasdaq: TELM) in a stock-for-stock transaction (see Tellium, Zhone to Merge).

This is Zhone's ninth acquisition since its inception in 1999, and it may be one of the first Zhone deals that lets cash trump technology.

Core optical switch maker Tellium has struggled to win new customers and generate meaningful revenue. The company has been plagued by layoffs, and recently a group of investors reportedly looked to gain control of the company and liquidate its assets (see Tellium Lays Off 130, Tellium Wields the Axe, and Tellium Takeover Plan Brewing).

Mory Ejabat, chairman and CEO of Zhone, will be CEO of the newly combined company. Neither company has yet mentioned what will become of Tellium's chairman and CEO, Harry Carr. The two companies are, however, hosting a conference call today at 5:00 p.m. EST to discuss the deal.

It’s easy to see why Tellium would agree to the deal. This morning the company reported that it lost $12.1 million on revenues of $10.1 million for the second quarter. The company's revenues are expected to drop drastically once it finishes redrawing its agreement with Cable & Wireless (NYSE: CWP) (see C&W, Tellium Rework Contract).

What's harder to understand is why Zhone would want Tellium. The company's share a customer in Qwest Communications International Inc. (NYSE: Q), but they sell to different parts of that business. Up to this point Zhone has focused on edge and access technologies, including digital loop carriers, broadband multiplexers, etc. Tellium’s Aurora switches are designed for long-haul and core optical networks. It’s OC192 grooming features make it a box that is only useful in some of the largest networks in the world.

It may be that Zhone is buying Tellium for the company's $149 million cash kitty. Zhone finished 2002 with $10.6 million in cash, according to a Securities and Exchange Commission (SEC) filing dated July 25, 2003. And as of the end of the second quarter of 2003, it had only $1.9 million in cash. "Tellium’s cash position has made it an attractive acquisition target for a while,” says Mark Lutkowitz, principal with Telecom Pragmatics Inc. “The company has good technology, but it’s ahead of its time. No one needs an OC192 grooming switch right now.”

Zhone desperately needs cash to further its business. While it saw some growth in the second quarter, the company admits in its SEC filings that it needs to invest in newer technologies.

For the second quarter of 2003, Zhone reported $20.5 million in sales, up 20 percent from net sales of $17.1 million for the first quarter of 2003, which ended March 31 (see Zhone Sales Up in Q2).

Though Zhone is a private company, it files quarterly earnings with the SEC because it now has over 500 investors, according to David Markowitz, vice president of marketing for Zhone. The company began reporting earnings after it completed the acquisition of NEC Eluminant Technologies Inc. (see Zhone Gets Eluminated).

“Tellium will definitely provide us with more currency for future acquisitions,” says Markowitz. “But we look at lots of parameters, including the technology and market share before deciding to acquire a company.”

— Marguerite Reardon, Senior Editor, Light Reading

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reoptic 12/4/2012 | 11:42:37 PM
re: Zhone Cashes In on Tellium Mory is great at doing deals, starting with how he bought Cascade cheap and sold Ascend high. Now he gets 60% of Telm with their 10M in revenue and their 150M in cash. Considering Mory has minimal cash and 100M in debt, that isn't bad for him. Telm gets a good sales force to sell their products and the bigger revenue stream. Pretty solid combined executive team too. This could work.
newbee2002 12/4/2012 | 11:42:36 PM
re: Zhone Cashes In on Tellium Telm investors got raped for their cash. Tellium's $150M may keep Zhone alive for a few more quarters.
skeptic 12/4/2012 | 11:42:35 PM
re: Zhone Cashes In on Tellium Telm investors got raped for their cash. Tellium's $150M may keep Zhone alive for a few more quarters.
----------
Zhone's losses are down to 5 million a quarter
now. If they shut down most of tellium, that
cash could last for a long while. Its more
likely that Zhone will use it as leverage for
more and bigger deals though.

WiserNow 12/4/2012 | 11:42:31 PM
re: Zhone Cashes In on Tellium Mory makes lots of deals, but the question is whether any of those deals create real value for the investors. By investors, I don't mean the insiders, who have a short term interest.

At Ascend, Mory and co. bought many companies, few of which held together or generated value following their acquisition. Even Cascade, the jewel that caused Lucent to buy Ascend, was hounded into disfunction following the acquisition. The key Cascade leaders left Ascend/Cascade. The collapse of the core networking group was in the cards even prior to Lucent's acquisition.

Do Tellium investors have a better chance of seeing their investment yield returns following the Zhone merger? I doubt it. This type of deal making is destroying confidence in the American stock market.

I would love to see an American company revitalize the telecom sector. I don't think it will come from the short-sited self-centered Mr. Ejebat and his cronies.
Sibylle 12/4/2012 | 11:42:31 PM
re: Zhone Cashes In on Tellium This is getting epidemic.

Normally a profitable public company with lots of cash buys a private company with no cash.

What we have here is a lossy private company with no cash buying a public company with lots of it.

Whats the incentive to sell ?

The incentive is criminal.
techoriginol 12/4/2012 | 11:42:31 PM
re: Zhone Cashes In on Tellium Why would Zhone want to acquire an optical switching company? It's certainly not the technology. Tellium has more short term cash than what the company is worth (Market capitalization ~ $100 million) - weird. Zhone is not worth a small fraction of Tellium.

The first thing that will happen is that most people at Tellium will lose their jobs. Zhone usually sweeps away any remnants of development and engineering as soon as the acquisition legalities are done. Zhone does little or no development work, buys other peoples work and soon claims that they "Zhone" are the "last mile access experts". Zhone for all practical purposes cannot even properly sustain the product lines that they already own. This is once again a case of Fat Cat Mory and his side kick wanting to get fatter. He really does not know much more about technology than I as an American, about his Farsi language. Zhone is like a company of vultures who basically want to cash in other peoples work while showing them pink slips. Yes every company is all about money, and the bottom line. But most "for profit" companies also have ethics. Not here. Zhone and its CEOs should be audited and investigated BIG TIME. This is my humble opinion.

Acquire and Fire - This is the Zhone formula for success.
Sibylle 12/4/2012 | 11:42:31 PM
re: Zhone Cashes In on Tellium
Seems like the days of zero-cost buyout are behind us. What we are in now is negative-price buyouts.

Does this mean option-holders in the acquired company have to pay the acquirer ? For the privilige of being acquired ?

Take my options ! I want to get off !!
ragnar 12/4/2012 | 11:42:29 PM
re: Zhone Cashes In on Tellium "However, I have no idea if the Zhone people have the vision or capability to make something like that happen. And, even this rosy scenario is an extreme long shot."

-------------------

While Mory may be the ultimate deal maker (he snookered Dan Smith on CSCC) the word vison can never be used in conjunction with Jeanette. The words should never even be used in the same sentence.

The word clueless would be a far more appropriate adjective for her, but I believe that adjective is taken....



gea 12/4/2012 | 11:42:29 PM
re: Zhone Cashes In on Tellium Well, I admit I really don't know anything about Zhone, other than some distant memories about a quasi-interesting Metro box I think they had a long time ago (but I could be confusing that with another company).

Tellium, on the other hand, needs rescuing. They occupy a very specific niche in the 'optical' networking world, and while I still believe that there's value in that niche, that value is not enough for them to go it alone. If Tellium is augmented by gear that then provides an end-to-end solution (access/metro/long haul), then some GMPLS capabilities might give this new combo some powerful capabilities, making it a nice product for network's like, say XO.

However, I have no idea if the Zhone people have the vision or capability to make something like that happen. And, even this rosy scenario is an extreme long shot.
TelCoEngineer 12/4/2012 | 11:42:28 PM
re: Zhone Cashes In on Tellium then some GMPLS capabilities might give this new combo some powerful capabilities, making it a nice product for network's like, say XO.
*************
Problem is, you have to have high service churn to justify the cost of the Tellium switch - otherwise "Bob the Switch Tech" is way cheaper. This applies ever more so to GMPLS.

Even if you take into account the mesh network architecture savings (which requires dense connectivity - something XO does not have), the cost of the switches NEVER pay back. The lines just don't cross.

As cool as the Tellium box is, there is just no market that can be seen until at least 2006 - and only then when network growth returns to a level a couple of orders of magnitude above that of today.

So....this is just a cash grab. Look for the Tellium IP to be piece parted out and a few more homes to go up for sale in New Jersey.
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