ADVA Snaps Up Covaro

After months of talks and speculation, metro Ethernet equipment firm ADVA Optical Networking (Frankfurt: ADV) has finally announced an acquisition, and its target is in the increasingly hot Ethernet access sector. (See ADVA Acquires Covaro and ADVA Eyes Movaz, Meriton.)

ADVA is to pay up to $24 million in stock and cash for Covaro Networks Inc., which makes Ethernet devices that sit in customer buildings and at the edge of a carrier's network. ADVA is paying $19 million initially, comprising $4 million in cash plus $15 million in new stock. Up to $5 million more will be paid if Covaro hits sales and gross margin targets in the final quarter of 2005 and the whole of 2006.

ADVA believes the acquisition will dilute its earnings per share (EPS) "to a limited extent" in 2006 after the takeover is completed (expected January 2006), but that it should add to the firm's EPS in 2007 and beyond. The news sent ADVA's share price up slightly, by 7 Euro cents, to €6.07 in morning trading on the Frankfurt exchange.

ADVA's move is the latest in a string of strategic acquisitions in the Ethernet sector, and comes just over a year after it completed the purchase of Metro Packet Systems (See Meriton Acquires Mahi, Ericsson Swoops on Axxessit, Alcatel to Buy Native for $55M, Juniper Shopping for Atrica?, and ADVA Completes Metro Packet Buy .)

So what will Covaro bring to the ADVA camp? Covaro's technology acts as the connection, or demarcation, point between the operator's infrastructure and business users' networks, making Covaro one of the specialist vendors in the increasingly important Ethernet in the First Mile (EFM) sector. (See Ethernet in Access Networks, IEEE 802.3ah EFM Standard Ratified, and MEF Absorbs EFMA.)

Covaro's technology is deployed to help with the delivery and management of Ethernet services over various first-mile technologies -- copper-bonding, circuit-bonding, fiber -- and provides important operations, administration, maintenance, and provisioning (OAM&P) capabilities. (See Covaro Intros Ethernet Demarcation, Covaro Adds Sonet/SDH, and Ethernet Faces OA&M Challenge.)

Ethernet service and device management is an area of intense focus for the Ethernet vendor community as it tries to meet service providers' requirements, with industry body Metro Ethernet Forum (MEF) currently developing standards to address current issues. And the importance of Covaro's capabilities were cited by ADVA's CEO, Brian Protiva, in the company's prepared statement issued this morning. (See Ethernet Growing Pains and Ethernet Faces OA&M Challenge.)

"The acquisition of Covaro will expand ADVA’s North American customer base, global product portfolio, and Ethernet engineering resources. [Covaro's] Etherjack products have extremely well-developed Operations, Administration, and Management (OAM) features and a broad set of available products for fiber, copper, SONET/SDH, and TDM interfaces," proclaimed Protiva.

The North American customer base referred to comprises mainly of local carriers such as and . According to the latest Light Reading Insider report, 'Ethernet in the First Mile: Who's Doing What,' Covaro has around 60 mostly unnamed customers, some of which are in Europe, and about 65 staff. (See Covaro Makes Progress, Memphis Networx Picks Covaro, and Insider Examines EFM.)

ADVA's press release says "a majority" of Covaro's staff will be retained, while the firm's engineering facility in Richardson, Texas, will become one of ADVA's development sites.

But while Ethernet access services and technology might be one of the telecom sector's hot growth areas at present, with vendors citing a sharp upturn in request for proposal (RFP) activity in 2005, according to the Light Reading Insider report, that's not necessarily translating into positive returns for early investors.

Covaro has raised $42 million since its inception three years ago ($16.7 million in August 2002, and $25.3 million in February 2004), at least $18 million more than the highest amount ADVA will pay. Covaro's investors are Centennial Ventures, which led the second round of funding, CenterPoint Ventures, InterWest Partners, and Sevin Rosen Funds. (See Covaro Raises $25.3M Funding Round.)

Neither company was available for additional comment as this article was published.

ADVA isn't only concentrating on developing the access portion of its portfolio to help boost its growing sales further. Light Reading recently revealed that the firm is currently developing a 40-Gbit/s metro switch. (See ADVA Plans 40G Metro Gear and ADVA Reports Big Q2 Revenues.)

— Ray Le Maistre, International News Editor, Light Reading

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The report, Ethernet in the First Mile: Who's Doing What, is available as part of an annual subscription (12 monthly issues) to Light Reading Insider, priced at $1,350. Individual reports are available for $900. For more information, or to subscribe, please visit: www.lightreading.com/insider.

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