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AFC Goes Multiservice

Light Reading
News Analysis
Light Reading
3/28/2002

After the market closed yesterday, Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) announced the $43 million acquisition of AccessLan Communications Inc., a 75-person startup focused on developing an ATM-based multiservice switch (see AFC to Acquire AccessLan).

The company also announced that it has already integrated AccessLan’s Telliant 5000 switch into its product line (see AFC Unveils Switching Platform).

The move into multiservice switches is particularly significant, because AFC is firmly entrenched in incumbent accounts, mainly as a provider of access gear. The sudden move into a new market is quite surprising. It may also be a sign that AFC's customers, mostly RBOCs and other incumbents, are now seriously considering a wholesale ATM-to-IP migration.

Since 1992, when AFC was founded, the company has primarily focused on providing digital loop carrier (DLC) equipment, remote terminals that aggregate copper access lines onto fiber links to the central office (CO). As a result, the company says it sells gear to more than 800 telephone companies, including U.S. RBOCs and international PTTs.

So what exactly is AFC going after? Right now it's a bit confusing. There are two main categories of products vying for the edge:



Theoretically, RBOCs and other incumbents currently supporting an ATM infrastructure -- but moving towards IP -- would be more likely to select a multiservice switch. Carriers building out an IP network would be apt to go with an edge router.

The Telliant 5000 from AFC/AccessLan is a multiservice switch. In other words, it is a full ATM switch that also supports DSL termination and aggregation. In the next six to 12 months, the company plans to add IP and MPLS support to the platform, making it truly multiservice.

But this category of product can be split once again into edge and core applications:

AFC's new Telliant 5000 is designed for a carrier’s central office and will most likely compete against the incumbent vendors like Alcatel, Lucent, and Nortel, according to Ryan Koontz, director of business development for AFC.

AFC has acquired two other companies in its history, but this is its first foray outside the DLC market. Still, AFC didn’t go into the multiservice switch market blindly: It had entered into an OEM agreement with AccessLan and was already exclusively selling the switch to its own customers since January 2002. Out of six customers testing the gear since the beginning of this year, three have already begun generating revenue, adds Koontz.

“The OEM agreement allowed us to test the waters a bit and validate the market with our customers,” he says.

AFC is in a strong position financially, with roughly $955 million in cash, $700 million to $800 million of which came from the 5 percent stake it held in Cerent when it was sold to Cisco Systems Inc. (Nasdaq: CSCO) back in 1998. Its share position doubled with the acquisition; and because AFC also hedged and shorted Cisco stock when it was trading at $65, the company has insulated itself from Cisco’s falling stock price, Koontz crows.

The total deal is valued at around $75 million, but because AFC already owns a minority stake in AccessLan, it will only have to pay out $43 million in cash and assume $4 million in liabilities. Additionally, all AccessLan options will become options to purchase approximately 1.2 million shares of AFC stock.

Analysts covering the company are positive about the prospects of the merger. “We view this acquisition as strategic and in line with the long-term plan laid out by the company earlier this year,” writes Andrea Green, an analyst with Lehman Brothers, in a research note published this morning. “While we expect this acquisition might be slightly dilutive initially, it appears to be at a reasonable price and in line with the company's long-term plan. Our sense is that another small acquisition, likely in the fiber to the curb/home area, is in the works for 2002 as well.”

The company’s stock was up 0.95 (5.22%) to 18.95 in midday trading.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com
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Scott Raynovich
Scott Raynovich
12/4/2012 | 10:42:33 PM
re: AFC Goes Multiservice
This seems like an interesting move to me. Anybody want to weigh in on whether AFC has a shot at the multiservice market?
edzed
edzed
12/4/2012 | 10:42:17 PM
re: AFC Goes Multiservice
AFC has a great management team(truly). It is rare to see any high tech company with lots of talent at the middle management layer.

They are clearly building a strong competitor to Alcatel in the local loop.

Their challenge is that they have little expertise at handling layer 3 and above. They must keep the AccessLan people and add more over time. Ethernet encapsulation and native IP expertise will be key to delivering services.

I would not bet against them.
Iipoed
Iipoed
12/4/2012 | 10:42:17 PM
re: AFC Goes Multiservice
They should buy Extreme or Foundry next.
stuartb
stuartb
12/4/2012 | 10:42:07 PM
re: AFC Goes Multiservice
"AFC has a great management team(truly)." ??

That's far from true, all the real talent left AFC awhile ago for originally Cerent, then Mahi, Turin and Calix. They haven't brought a new product to market in more than 2 years, and have done very little in the way of bringing in any new business. They're marketing is also practically non-existent.

How good of a product can the Telliant be for $43 million? I'm sure they will get exactly what they paid for.

-Stu
edzed
edzed
12/4/2012 | 10:41:57 PM
re: AFC Goes Multiservice
Oh yeah. You must live in Decatur. I heard that companies there have VERY low turnover.

AFC is a great training ground for themselves and for other companies. That is a product of organizational structure and discipline.

Their revenues really stink, though. I cannot believe that they can barely hold them at the same levels considering the boom that's going on out there.

What a stupid investment they made in Cerent. They are probably going to do the same dumb thing with AccessLan.

Couldn't they get some better customers than boring companies like Verizon and SBC?

AFC continues to gain market share. (period)

Their core platform, the UMC-1000, continues to gain features that allow carriers a smooth migration from the past into the future. The whole idea is to avoid new platforms to target the same space. This is called a forklift upgrade.

What would you do in their place? Please enlighten us LightReaders on the correct direction.
skibum
skibum
12/4/2012 | 10:41:56 PM
re: AFC Goes Multiservice
<laughing>
edzed, you really have no idea what your talking about. It is true that most everyone has left. They are the ones that tried to get AFC to Buy Cerent not invest. Right now the management is a bunch of ex-racal datacom guys who no nothing about telecom. Have you heard of Racal Datacom, of coarse not it isn't around anymore. Right now AFC is riding the coat tails from what was developed 3-5 years ago and the customers are from that same generation of folks. Those people have left for Calix,Turin,Mahi and Cerent.
Buy your tone and your "smooth migration" you must be from AFC marketing.</laughing>
edzed
edzed
12/4/2012 | 10:41:47 PM
re: AFC Goes Multiservice
I am talking about the company as it is run since John Schofield took over in April 1999.

When Schofield came in, the stock was under $10 (currently $19), and the company was struggling. You do not go and do major acquisitions when your core business is not operating properly.

People who are good at building new companies are not good at running them. That is why AFC should be glad that all of them left to do something productive. The company then brought in real executives to run the company.

Cerent would just be White Rock if they were not bought by Cisco, a real company. Remember all of that BS Cerent was spouting about also being a DWDM and wavelength routing box? (I heard them speak at SuperComm right before they were bought).

I did not say AFC is perfect. But the bottom line is they have been able to consistently increase market share and gain customers. As well, they have made real earnings and grown their cash balances.

The new product is called AccessMAX System 8, released last spring. Show me a competitor who has a better solution. Is it Nortel, who was doing so well in access that they junked it and sold it for scrap to Zhone? Or is it Marconi, who is clearly blowing the doors off the competition? Alcatel has the only serviceable alternative, and their DLC is not as flexible as AFC's.

It is easy to take pot shots. Tell me what they should do now. Would you buy AccessLan? Would you buy someone else? What would YOU do with all the Lucent SLC-5 boxes in the field?
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