Optical/IP Networks

ECI Draws Up New Dance Card

In a conference call with analysts yesterday, ECI Telecom Ltd. (Nasdaq/NM: ECIL) officials quickly addressed the bigger questions surrounding the pending acquisition of Laurel Networks Inc. -- namely, what happens to Laurel's partnerships?

ECI announced it has agreed to buy Laurel for $88 million in cash -- only about three quarters of the amount Laurel raised in venture funding since its inception (see ECI Closing in on Laurel and ECI to Buy Laurel for $88M).

Among the question marks were the reseller deals Laurel had struck as a way to increase its market visibility in the battle against router leaders Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR). (See Ciena Takes Stake in Laurel and Laurel & Marconi Make It Official.) ECI has that all straightened out already, CEO Doron Inbar told analysts.

Laurel's partnership with Ciena Corp. (Nasdaq: CIEN) should survive the acquisition. In fact, Inbar noted he's been in touch with Ciena CEO Gary Smith to discuss possibilities for expanding the relationship after the deal closes.

Most of Laurel's reseller deal with Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) likely won't continue, Inbar said. However, ECI officials did say that Laurel's U.S. government business with Marconi will continue.

One factor in the larger picture of the Marconi partnership is that Marconi has already found a partner in Huawei Technologies Co. Ltd., although that relationship could change after Huawei's surprise win in the BT Group plc (NYSE: BT; London: BTA) 21CN network (see Marconi Hitches a Ride With Huawei and Could Huawei Buy Marconi?). Separately, the Laurel acquisition would mark the end of ECI's partnership with Redback Networks Inc. (Nasdaq: RBAK), which was struck in November as a way to broaden ECI's IP portfolio (see Redback and ECI Buddy Up). Laurel fills that role now -- but the Redback alliance wasn't off to a blazing start anyway.

"No, we did not do much with the Redback relationship," Inbar told analysts. The Laurel acquisition makes competitors out of ECI and Redback, but Inbar noted that both companies have bigger issues to worry about: "Redback and ECI are looking more after the Cisco portion [of the market] than each other," he said.

The call revealed Laurel is losing money, but its revenues are on the rise. Laurel closed fiscal 2003, ended July 31, with $6 million in sales and grew to $11 million in fiscal 2004. For the 12 months ended April 30 of this year, Laurel's revenues were $18 million. Barring any major market surprises, ECI is expecting Laurel to be profitable by the middle of next year.

ECI appears to want to retain Laurel's nearly 150 employees. Inbar said ECI has offered Laurel employees an incentive package, presumably including stock options, that has been well received. He didn't specify how many of the employees it would like to keep, however.

— Craig Matsumoto, Senior Editor, Light Reading

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