Alcatel Acquires Astral Point -- Cheap

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
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lu-alum 12/4/2012 | 11:01:49 PM
re: Alcatel Acquires Astral Point -- Cheap Employees basically get 63 ALA shares for every 1000 shares of AP. If you assume ALA is at 15/share, thats $.945 per share. Could be less than many of them paid for the shares in the first place. Ouch.
myresearch 12/4/2012 | 11:01:50 PM
re: Alcatel Acquires Astral Point -- Cheap Assume that all valuation is post-money (i.e., the valuation after the close of the fund), and
the founder and employee option pool is 10m (the
exact number does not matter - the valuation mattes).

1) First round: $10m at $20m valuation:

Share price: $1
Dilution: 50%
New shares issued to VC: 10m
Founders & Employee option pool: 10m
Total shares: 20m

2) Seond round: $60m at $110m valuation:

Share price: $4
Dilution: 27%
New shares issued to VC: 7.5m
Total VC shares: 17.5m
Founders & Employee option pool: 10m
Total shares: 27.5m

3) Third round: $60m at $500m valuation:

Share price: $16
Dilution: 12%
New shares issued to VC: 3.75m
Founders & Employee option pool: 10m
Total shares: 31.25m

After the 3 rounds: VC holds 68% of
the company, and founders & employees
option pool 32%. Because the valuation
increased substantially each round, the
dilution is quite reasonable. Of course,
we assume no special protection clauses
are attached. In case of APN, this is
the key. If there is protection clause
for "down-round" (i.e., the previous VC's
share price cannot go down.).

Suppose this company is sold for $135m.The price
is $4.32 per share. The 3rd round VC will get
$60m back at $16 per share. The 2nd round VC will
get $31.88m. The first round VC gets $43.2m.
the founders and employee option pool gets $8m
(about 80 cent per share).


myresearch 12/4/2012 | 11:01:50 PM
re: Alcatel Acquires Astral Point -- Cheap Sorry, the pre-money and post-money should
be reversed. Ie.

If $10m at $20m post money, you give away 50%
If pre-money, you give away 33%.

myresearch 12/4/2012 | 11:01:51 PM
re: Alcatel Acquires Astral Point -- Cheap Flanker,

Thanks for the great analysis. But I dont
understand your second post on the percentages:

>Round 1: 10mln @ 20mln valuation
> (10,000,000 shares @ $1)=41% of shares authorized

If you raise $10m on a pre-money value of
$20m, you give away 50% of the shares.
If the $20m is post-money, you give away
33% of the shares. How does the 41% come
from? Can you explain?


> Round 2: 30mln @110mln valuation
> (6,000,000 shares @ $5) = 24% of shares auth.
> Round 3: 60mln at 500mln valuation
> (6,000,000 shares at $10 = 24% of shares auth.
lambdaguy 12/4/2012 | 11:01:51 PM
re: Alcatel Acquires Astral Point -- Cheap Metro Optix is available... no real cusomers
LuxN could still be a good play...40 customers
the options are drying up..........
konaboy 12/4/2012 | 11:01:52 PM
re: Alcatel Acquires Astral Point -- Cheap What about Appian and Alidian? Did they burn out, fade away, or get taken out?
optical_man 12/4/2012 | 11:01:53 PM
re: Alcatel Acquires Astral Point -- Cheap HarveyMudd,
Are you laid off? Do you work? I wonder if your internet access was cut off at work, would you be more productive? You seem to lurk around here bashing everything. You have an opinion on Everything. Do your colleagues not listen to your valued opinions? If they did, would your outlook change?
Bashing startups is like saying the British Empire is brilliant (circa 1890) and all those other startup countries are junk. And what happened?
Try this, say "I will not surf at work for 3 weeks". Can you?
On another note, 80% of all restaraunts fail. Guess we should all just go to McDonalds for all our meals, as this is a LARGE company, therefore has the best value for us....

ps, this message has been posted on 3 different message chains now. Just trying to catch old Harvey (boy, that Nortel facility must have a FAT pipe, the way Harvey gets around LR!)
silent mariner 12/4/2012 | 11:01:55 PM
re: Alcatel Acquires Astral Point -- Cheap You guys are all a hoot. I would bet that not one of the naysayers has seen the 7000, heard customer feedback or been involved in testing of it. I am not one of the employees there but know enough people and about the product to know that people on this thread are blowing warm air.

As far as Alcatel's history, there is no arguing their history...
HarveyMudd 12/4/2012 | 11:01:57 PM
re: Alcatel Acquires Astral Point -- Cheap After a disatrous four years, US Alcatel is not able to do anything on its own. The company's market share is sliding.

All its previous acquisitions have failed miserably. Now it is another mis-step in its product strategy.
gardner 12/4/2012 | 11:02:01 PM
re: Alcatel Acquires Astral Point -- Cheap
Take a look at White Rock Networks stuff (url: www.whiterocknetworks.com).

[shameless sales pitch deleted]

Don't know how real it is but you might want to send them that RFP/RFI.

So, how long have you been working at White Rock? Are the benefits good?
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