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Alcatel Acquires Astral Point -- Cheap

Light Reading
News Analysis
Light Reading
1/22/2002

Good things come to those who wait. Over a year after Alcatel SA (NYSE: ALA; Paris: CGEP:PA) first put out feelers to purchase Astral Point Communications Inc., it's agreed to buy the startup for stock worth a mere $135 million (see Alcatel To Buy Astral Point).

Alcatel says the acquisition will increase its strength in the U.S. metro Sonet market. Astral Point, founded in 1998 and based in Chelmsford, Mass., makes a multiservice provisioning platform that combines a crossconnect with DWDM and Sonet add/drop multiplexing capabilities.

Reportedly, Alcatel got as far as drawing up papers on the deal last year, but top execs backed out, possibly because Alcatel's other activities interfered (see Alcatel Seeks to Buy Optical Startup, which we summarized in November 2000 as follows: Something optical, metropolitan, and cheap, s'il vous plait. Astral Point, perhaps?).

Over a year later, the buyer's clearly got a bargain. Terms of this acquisition are substantially lower than comparable agreements -- such as the $355 million recently laid out by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) for Ocular Networks (see Tellabs Nabs Ocular) or the $421 million Nokia Corp. (NYSE: NOK) bid for Amber Networks in July (see Nokia Nabs Amber for $421M).

Is more than the downturn at work here? Was this a "fire sale," in which lack of new funding forced the startup to sell out or go bust?

The startup's not saying that, but it's clearly had its problems. Despite $115 million in venture funding, it's generating just $4.5 million in revenues annually to a handful of customers. In addition, there have been ups and downs with those customers, the cancellation of an early product, and layoffs (see Astral Point Slims Down). The startup's now down to 175 employees from 250 last year. Alcatel says it hopes to hold onto the existing workers, particularly in management and R&D.

"There's a lot of cutback in the metro space," says Steve Kamman of CIBC World Markets. "As a result, VCs are telling us a lot of startups will just plain get cut off this year."

Alcatel, obviously pleased with the purchase, didn't dwell on the price with analysts and media today. "We had to do something on the Sonet side of our business, and this is positive for us all," said Christian Reinaudo, president of Alcatel's optics activities, in a conference call this morning.

Reinaudo said Alcatel hopes to use Astral Point's product to buttress its own line of metro products, including the 1680 Optical Gateway Cross-Connect (OGX).

He said it was important that the startup was able to demonstrate shipping products -- even though only one of its products, the ON 5000, is actually shipping. The ON 7000, announced last year, is presently in beta test with several prospects, including one ILEC (see Astral Redirects Its Point, Astral Point Starts ILEC Beta, and Astral Point Starts Beta Test). It is expected to ship commercially this quarter.

Astral Point added Sonet STS1 grooming capabilities to its platform with the unveiling of the ON 7000 last year, about the same time rumors first surfaced that Alcatel had come calling.

Alcatel plans to begin selling Astral Point products as-is from its U.S. headquarters, migrating them into Alcatel's network management system within six to eight months. Alcatel also plans to integrate Astral Point's technology into its hardware, using the startup's DWDM and Sonet grooming capabilities to add density to existing Alcatel gear.

Some observers applaud the acquisition, despite the lowball figure. "Wow, that's a low price," says Frank Dzubeck, president of Communications Network Architects (no Website), who acts as an advisor to Astral Point but apparently hadn't heard the published sales figure. "But it's a good fit."

Dzubeck says Astral Point's knowledge of ATM (which he says was a key part of its now-superseded original product) was vital to the choice, since Alcatel relies heavily on ATM in its products.

Also key were Astral Point's early entry to the multiservice provisioning market and its entrée with RBOCs through its certification efforts (see Astral Point Extends OSMINE Effort and Astral Point Wins ISO Certification).

"Astral Point's gotten into RBOC labs, which Alcatel dreams of," Dzubeck says. Despite its ATM orientation, Alcatel hasn't penetrated RBOC networks, which are also ATM-based, to an extent anywhere near to its liking.

Astral Point is only the second optical networking vendor Alcatel's bought within recent months. Indeed, the vendor seemed to lose its optical appetite after acquiring component maker Kymata Ltd. in September 2001 (see Alcatel Optronics Acquires Kymata). But the price was right. And Alcatel apparently thinks it needs the Sonet provisioning capabilities Astral Point has to offer.

Reinaudo stressed this point today, saying Alcatel's acting on forecasts that Sonet will continue to dominate carriers' networks in North America for the foreseeable future. By 2004, Alcatel says, two-thirds of the North American metro optical transport market will still be Sonet-based.

Dzubeck says it's a market that's heating up, driven largely by ongoing developments in streaming video. Multiservice provisioning platforms will likely get scooped up by larger players as demand for metro bandwidth increases due to streaming media applications. "This isn't the last acquisition you'll see in this space, by Alcatel or anyone else," he says.

Alcatel says the acquisition, which is expected to close this quarter, won't affect Alcatel's financials for 2002, but the company hopes to start realizing revenues from Astral Point's products in 2003.

At press time, Alcatel shares were trading at $15.29, down $0.40 (2.55%). — Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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samTheFish
samTheFish
12/4/2012 | 11:02:51 PM
re: Alcatel Acquires Astral Point -- Cheap
The story says Astral Point cancelled their initial product - it was their second product, the ON2000, that they cancelled.

SamTheFish
etherguy
etherguy
12/4/2012 | 11:02:50 PM
re: Alcatel Acquires Astral Point -- Cheap
predictions? $135m. on $115m invested. pretty sorry.
mplsrocks
mplsrocks
12/4/2012 | 11:02:50 PM
re: Alcatel Acquires Astral Point -- Cheap
Sonet or Next gen SONET as it has now come to be called still sells. And it will continue to outsell the DWDM equipment by a huge margin. This acquisition highlights the fact that SONET beacuse of its ominpresent nature in the incumbents nettworks isn't going anywhere in a hurry as many optical vendors would have us to believe.

The fact of the matter is that SONET will remain in the carriers networks till the vendors can show the carriers that they have an all optical DWDM solution which can do all that SONET can do, and much more..

SONET is here to stay and technologies that can use SONET as a migration path to all optical networks will emarge the winners
optigirl
optigirl
12/4/2012 | 11:02:49 PM
re: Alcatel Acquires Astral Point -- Cheap
Sad but probably true....and there is nothing to say that they will get to keep their jobs either. Expect to see a lot of cuts coming soon for non-important or redundant persona.
optigirl
optigirl
12/4/2012 | 11:02:49 PM
re: Alcatel Acquires Astral Point -- Cheap
18% return on an investment in the optical space looks pretty darn good right now when you consider how far behind you would be if you had invested $$$ in the other companies out there....

Sometimes you just have to say, "the glass is .02 ounces full".

:-)
billy_fold
billy_fold
12/4/2012 | 11:02:49 PM
re: Alcatel Acquires Astral Point -- Cheap
And I bet the employees got washed out.

Billy
sjd5
sjd5
12/4/2012 | 11:02:48 PM
re: Alcatel Acquires Astral Point -- Cheap
A big dissapointment for AP employees. Big changes
working for Alcatel.

I would expect alot of them to bail out.
If they can find a place to go, that is.
apucheril
apucheril
12/4/2012 | 11:02:48 PM
re: Alcatel Acquires Astral Point -- Cheap
Astral Point and Alcatel deserve the credit in saving the technology by getting into this agreement.
optiplayer
optiplayer
12/4/2012 | 11:02:48 PM
re: Alcatel Acquires Astral Point -- Cheap
The VC's invested $115M but they didn't get the whole $135M (some portion must have gone to the emplyees) so they lost money - there was no 18% return

This was a disaster from a VC perspective.
tiadakola
tiadakola
12/4/2012 | 11:02:47 PM
re: Alcatel Acquires Astral Point -- Cheap
Actually, not necessarily true...depends on who holds the preferred stock versus the common shares. And also it depends on some of the other financial ratios (especially when accepting a down round...if AP had to, can't remember)...some of these things can be quite onerous.
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