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Atmosphere Comes Back to Earth

Light Reading
News Analysis
Light Reading
6/22/2000

Atmosphere Networks Inc. has finally found a buyer.

Ditech Communications Corp. http://www.ditechcom.com (Nasdaq: DITC) today announced it has signed an agreement to acquire privately-held Atmosphere, of Campbell, Calif., for approximately $88.5 million in stock and up to $10 million in cash.

Atmosphere http://www.atmospherenetworks.com had been known to be seeking a buyer for quite some time (see Atmosphere On The Block? ), and in today's market, $88.5 million is no jackpot. In fact, it has all the hallmarks of a going-out-of-business-sale in comparison to other recent stock deals --such as Lucent's http://www.lucent.com (NYSE: LU) acquisition of Chromatis for $4.5 billion and Sycamore Networks Inc.'s http://www.sycamorenet.com (Nasdaq: SCMR) acquisition of Sirocco Systems for $2.9 billion in stock.

The deal with Ditech looks as though it's designed to compensate Atmosphere's backers for a disappointing outcome. Atmosphere shareholders will receive a merger consideration valued at $88.5 million, primarily in stock, according to a Ditech statement. Some Atmosphere employees will receive cash--up to $10 million of it.

If the average closing price of a share of Ditech common stock falls to less than $73.75, the merger will be valued at 1.2 million shares of Ditech common stock, according to Ditech. This will be reduced to 1 million shares of Ditech common stock if the average closing price is greater than $88.50.

During mid-morning trading, Ditech shares were at $85.00, down 2.94 or three percent on the day. At that level, the company had a market capitalization of $2 billion.

Ditech, based in Mountain View, Calif., is a telecommunications equipment supplier for voice and data networks. For the fiscal year ending April 30, the company reported 116.9 million in revenue and $29.9 million in net income. Better known in the voice market, the acquisition reflects Ditech's desire to move more directly into the optical networking market.

The company is also expected to grant the Atmosphere Networks employees four-year vesting stock options covering up to 750,000 shares of Ditech common stock at a price representing up to a 50 percent discount to the market, according to the company.

Atmosphere has been struggling for months to sell the company, according to sources. After cancelling several publicity tours, the company hired the investment bank of Credit Suisse First Boston http://www.csfb.com to shop them around, according to one source familiar with the deal. Atmosphere then pulled out of the Supercomm trade show--at which time Sycamore's deal for Sirocco was announced.

"That Sirocco deal sent a chill through the market because a lot of companies were disappointed it wasn't them," said yet another source familiar with the optical networking M&A landscape, asking to remain unnamed. Why did the company have such a tough time? One reason was that Atmosphere's choice of technology has fallen out of favor: it led the charge in developing ATM VP ring networking equipment, which has become outdated.

Originally, Advanced Fiber Communications Inc., Atmosphere's major customer, was named as a potential suitor. But apparently AFCI said no.

--By R. Scott Raynovich, Executive Editor, Light Reading (http://www.lightreading.com

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