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Optical/IP

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
http://www.lightreading.com
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etherguy 12/4/2012 | 11:02:47 PM
re: Alcatel Acquires Astral Point -- Cheap i don't think this is considered a disaster by the vc's. these days the vc's are getting "liquidation preferences" which means that to a point, any liquidity generated by ipo or sale of the company goes straight to the vc's and whatever is left goes to employees. i'm not saying the vc's in this case had this provision but i wouldn't be surprised. i heard the vc's had a small loss in this deal and the founders got a couple of bucks, the employees get to keep their jobs a little longer. i'm thinking: not a home run but not geyser either.

optigirl 12/4/2012 | 11:02:47 PM
re: Alcatel Acquires Astral Point -- Cheap I wouldn't be so sure that the empoyees got anything out of this. I would hope that they would but that's being unrealistic.

Disaster? Depends on what you compare it to. Not a great way to impress your clients but again, it's better than shutting the doors and getting nothing and sometimes, that's the best you can do.
flanker 12/4/2012 | 11:02:46 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....

You can't estimate the return on equity or investment because you don't know the valuation for each round of financing. It's likely the round 1 investors made a little something and that the investors in round 2 or 3 lost everything or got a few pennies back on each dollar invested (ie, lost money).

Cheers to Alcatel for the bargain purchase. About time the VCs learned they over-invested in the sector.





salsa 12/4/2012 | 11:02:46 PM
re: Alcatel Acquires Astral Point -- Cheap It is a good deal for everyone, given the current conditions of the market. Days of getting rich out of a start-up are over, and I don't think employees will complain (assuming they are paid mostly in cash, rather than stock options).
tiadakola 12/4/2012 | 11:02:46 PM
re: Alcatel Acquires Astral Point -- Cheap Agreed...the liquidation preferences can be out of control...an example I recently became aware of was a local (495 ish) edge startup had to give 3 t 1 liquidation preferences to receive their most recent round (to keep the doors open)...what does that mean? If the amount of investment into that company was, oh, a total of $100m for all rounds...the common shareholder wouldn't receive a dime uless the sell price was over $300m...OUCH BABE!
Route495 12/4/2012 | 11:02:45 PM
re: Alcatel Acquires Astral Point -- Cheap So assuming there were 90m shares of AP which got exchanged for 9m alcatel shares.
Employees got one Alcatel share for every 10 AP shares. Assuming an engineer has 20000 AP shares which got converted to 2000 alcatel shares.
At $15 per Alcatel share, will it be $30,000?
It is a nice little bonus if nothing else, plus most of them also retain their jobs.



flanker 12/4/2012 | 11:02:45 PM
re: Alcatel Acquires Astral Point -- Cheap ...the liquidation preferences can be out of control...an example I recently became aware of was a local (495 ish) edge startup had to give 3 t 1 liquidation preferences to receive their most recent round (to keep the doors open)...what does that mean? If the amount of investment into that company was, oh, a total of $100m for all rounds...the common shareholder wouldn't receive a dime unless the sell price was over $300m

Gernerally the liquidation preference is on "dollars invested" not the valuation. A 3x liquidation preference on $10mln invested at a $300mln valuation in a company with $40mln in existing invested capital is $30mln, not $900mln ($300mln x 3) nor $150mln ($40mln+$10mln x 3).

I am curious if anyone is engineering them differently.

Flanker
Titanic Optics 12/4/2012 | 11:02:43 PM
re: Alcatel Acquires Astral Point -- Cheap >>Gernerally the liquidation preference is on "dollars invested" not the valuation. A 3x liquidation preference on $10mln invested at a $300mln valuation in a company with $40mln in existing invested capital is $30mln, not $900mln ($300mln x 3) nor $150mln ($40mln+$10mln x 3).<<

Let's say there is $100 M invested, with $10 M Round 1 ($20 M post-money valuation, employee stock $0.50 share, preferred round $1 share), $30 M round 2 ($110 M post-money valuation; employee $1 per share, preferred round $5 per share), and $60 M for round 3 ($500 M post-money valuation; employee $2.50 per share, preferred $10 per share). The company sells for $150 million. Who get's what? I didn't quite follow your example, but would welcome a very detailed breakdown. This would be a great, valuable tutorial for all the engineers that read lightreading who hold stock options.

Hoping your options aren't underwater,
Yours truly,
Titanic Optics
erwin 12/4/2012 | 11:02:42 PM
re: Alcatel Acquires Astral Point -- Cheap When Astral Point last raised its capital, namely May-June 2000, optical valuations were still in their "ridiculous" stage, and thus the total $113M of equity raised in that and previous rounds would have been at valuations that would have led VC's to significantly lose money on a $135M sale.
The only caveat would be if there had been any recent, unannounced working capital infusions to keep the company alive until a sale, which could have been very likely since Astral Point's mid-2000 cash was nearly exhausted by now (part of the reason behind the downsizing). In that case you can bet your children that the VCs would have put onerous terms for any bridge investments including a way lower valuation and liquidation preference terms. That is if they were smart VCs, which remember we have to question since they invested in Astral Point in the first place.

And now on to the second point (pardon the pun). However can Alcatel even see value in this company, when it has struggled for 2 years hawking a box that didn't seem to meet any market or architecture requirement, which bought some of its customers with stock options, and which hired industry rejects such as Bryan Hall which have worked for nearly every telecom company out there (and been fired from a few)?

So maybe the founders did get away with a load of cash? Who knows...do you?
Tudy 12/4/2012 | 11:02:42 PM
re: Alcatel Acquires Astral Point -- Cheap Cerent, Siara, Sirroco, Chromatis, AstralPoint, Cyras have all been acquired who remaining in the mspp area. Did geyser and mayan go by way of the dinosaurs?
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