AFC Goes Multiservice
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:
- Multiservice edge switches, which are essentially cell-based Asynchronous Transfer Mode (ATM) switches with some Internet Protocol (IP) and Multiprotocol Label Switching (MPLS) functionality stuck on (see Laurel Moves to Phase Three).
- Multiservice edge routers, or packet-based IP routers supporting a full suite of IP routing protocols (such as BGP4) and some others, often including ATM. Companies in this arena include Cisco, Juniper Networks Inc. (Nasdaq: JNPR), Laurel Networks Inc., Unisphere Networks Inc., and Redback Networks Inc. (Nasdaq: RBAK).
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:
- Startups such as, Gotham Networks and WaveSmith Networks Inc. play mostly at the edge.
- The core is dominated by large incumbents: Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Cisco, Lucent Technologies Inc. (NYSE: LU), Marconi PLC (Nasdaq/London: MONI), and Nortel Networks Corp. (NYSE/Toronto: NT), along with startup Équipe Communications Corp. (see Switch Vendors to Tackle Core Routing).
- (Then there is Network Equipment Technologies Inc. (net.com) (NYSE: NWK), which claims it can do everything. Bert Whyte, the company's CEO, takes issue with this claim, although he does say that the company is well suited for IP routing, ATM switching, DSL aggregation, service creation and subscriber management. "We don't do everything; we can't make tea and you can't send us to the moon," he says.)
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