Optical/IP Networks

Centerpoint Scoops Up Zaffire

After being on the auction block for the past several months, Zaffire Inc. has finally been sold (see Centerpoint Acquires Zaffire).

Centerpoint Broadband Technologies Inc., a privately held company that is building products with FDM (frequency-division multiplexing) technology, announced this morning that it has agreed to acquire Zaffire and its 150 employees in a stock swap. The exact amount of the deal is unknown.

Zaffire, which had raised about $100 million dollars, has struggled to stay alive as it has wrestled with management issues that have caused the company to change chief executive officers three times in the past nine months (see Zaffire: 'We're not for Sale').

“It’s no secret the company has had some issues. I read Light Reading,” says Dana Waldman, president and CEO of Centerpoint. “But the technology is extremely well thought of, and WDM had been a part of our road map for a long time.”

The first order of business has been to get rid of Zaffire’s old management team. Near Margalit, the founder and two-time CEO of Zaffire, will likely stay on with the company, but the rest of the upper management team will be let go, says Waldman.

“They’re doing this the right way,” says Chris Nicoll, vice president of Current Analysis. “They’re acquiring the technology and the team that developed it and doing away with the management structure. The key value nugget in Zaffire isn’t the market positioning or the management team; it’s clearly the technology, and they needed someone else to leverage those assets.”

Centerpoint wasn’t the only company sniffing around Zaffire. The startup’s inexpensive metro-area dense wavelength-division multiplexing (DWDM) solution and digital wrapper technology had sparked interest from public companies like Ciena Corp. (Nasdaq: CIEN), Marconi Communications PLC (Nasdaq/London: MONI), Alcatel SA (NYSE: ALA; Paris: CGEP:PA), and Redback Networks Inc. (Nasdaq: RBAK), which were all rumored to be hanging around the San Jose headquarters kicking the tires and making offers during the past four or five months (see Zaffire May Have a Buyer).

While all these other companies could have found a place for Zaffire’s technology in their product lines, Centerpoint seems to have needed it the most. Why? Centerpoint uses FDM technology to pack up to 32 Gbit/s worth of traffic onto a single wavelength. Meanwhile, Zaffire’s DWDM system can pack several wavelengths onto a single fiber. What Centerpoint lacked was the DWDM transport system.

“No carrier is using multiple vendors for wavelength services,” says Nicoll. “You really need to own the entire solution. Otherwise it’s a management nightmare.”

Adding DWDM to its product offering should further strengthen Centerpoint’s position against its main competitor Kestrel Solutions Inc., which is also developing an FDM product. Kestrel demonstrated interoperability with DWDM gear at the Optical Fiber Conference in March, but it didn’t name a specific vendor’s product. And considering that it just laid off about 120 employees last week and is also in the midst of repositioning, it doesn’t look as though Kestrel will be adding DWDM capability anytime soon (see Kestrel Quietly Reconfigures).

One big hurdle facing the combined company is customers. So far, Centerpoint hasn’t officially announced any. And the only two that Zaffire has announced, BroadBand Office Inc. and FiberStreet, have both gone out of business in the last six months (see Zaffire Gets Zapped). But Waldman says that Zaffire is very close to announcing a large European contract soon. Sources close to the company have confirmed this and say that Zaffire has already signed a major deal with Flag Telecom (Nasdaq: FTHL; LSE: FTL) in the U.K.

While the merger clearly had some concrete benefits for Centerpoint, what about Zaffire? Being acquired by another private company is not usually the ideal exit strategy for investors, since the ultimate return is still uncertain and locked up in an unrealized entity. But given the current market conditions, being acquired by a public company would probably have generated even less value.

“The way I look at it,” says one former Zaffire employee. “It has bought them some more time. I’m sure they are all sitting around hoping the market will turn around and Centerpoint will hit it big.”

- Marguerite Reardon, Senior Editor, Light Reading

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