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Lucent Gets Riverstoned

Craig Matsumoto
2/7/2006
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The struggles of Riverstone Networks Inc. (OTC: RSTN.PK) might finally be ending, as Lucent Technologies Inc. (NYSE: LU) has signed a deal to essentially buy the company for $170 million in cash.

The deal, announced today, hinges on Riverstone filing a voluntary petition for Chapter 11 bankruptcy protection. Once that's done, the company would put its assets up for auction. (See Riverstone Sells Assets.)

Lucent has made what's called a stalking-horse bid, having already signed a purchase agreement to pay $170 million for Riverstone's assets -- including products, technology, and buildings -- at that auction. It's possible that someone else could step in with a larger bid, although that appears unlikely. The setup gives Riverstone a guaranteed minimum price.

All of Riverstone's 400 employees are expected to join Lucent.

Riverstone's press release notes the company has enough cash to continue operations but is doing the bankruptcy dance to take advantage of Provision 363 of Chapter 11 of the U.S. Bankruptcy Code, which allows for this kind of auction. "We're just able to complete the sale faster than we would have otherwise," a Riverstone spokeswoman says.

Riverstone officials were not available before deadline to elaborate on that statement.

The news sent Riverstone stock skyrocketing, up 43 cents (81%) to a whopping 96 cents. That gives the Riverstone juggernaut a market capitalization of around $125 million.

Lucent, which has been reselling Riverstone equipment, would pick up a line of Ethernet boxes that Riverstone says are crafted for carrier networks. Riverstone's flagship box is the 15008 router; its most recently released products include access routers for Ethernet and MPLS. (See Lucent Adds Riverstone to Roster and Riverstone Aims for Access.)

That could be a milestone for Lucent as the carrier Ethernet market continues to heat up. "This fills an important gap in Lucent’s portfolio and likely will give the company a No. 3 market share position when the acquisition closes in mid-2006," says Heavy Reading analyst Stan Hubbard.

So, is the deal worth it? Who knows? Riverstone hasn't filed formal quarterly earnings statements for the past several quarters, leaving its financial situation murky.

The company has also worked under the shadow of an SEC investigation since April 2003 and has had to restate earnings for 2003 and 2004, in the process undergoing an audit that's delayed the earnings filings for all of 2005. Riverstone, already in financial trouble, sacked most of its senior staff and began reinventing itself as a carrier Ethernet specialist. (See SEC Calls on Riverstone, Riverstone Founders Resign, Riverstone Misses SEC Deadlines, and Riverstone Begins New Chapter.) That whole nightmare might finally be ending. Alongside the Lucent deal, Riverstone announced today that the SEC is considering a settlement with the company. (See Riverstone Gives Status.)

Riverstone was almost certainly losing money; it's just a question of how much. In November, the company said its break-even point had lowered to $30 million in revenues per quarter; at the same time, the company estimated it had shipped $16.1 million in hardware. (See Riverstone Claims Progress.)

Sources in the financial community have long assumed Riverstone would get bought out, with Lucent mentioned as a buyer multiple times last year -- but many believed Riverstone's absent financial reports were stalling any potential deals.

Heavy Reading analyst Rick Thompson, in his December 2005 report, "IP Video and the New Broadband Edge," noted that Riverstone, as a standalone, was not long for this world: "Riverstone is running on early success with carrier Ethernet, based on older RS-series products. It is continuing to get squeezed by the top players and cannot stand alone (and grow meaningfully) for more than the next year or two. Riverstone may need to be acquired or risk being systematically dismantled by stronger competitors."

It's worth noting that Lucent's buyout would not include Riverstone's cash or debt. The company reportedly has quite a bit of both. Its last 10-Q filing with the SEC, for the period ending November 2003, says Riverstone had $329 million in assets, $165 million of that in cash and short-term investments -- but much of that came from the November 2001 sale of $150 million in bonds that come due in December 2006. (See Riverstone Offers Notes.)

Assuming the deal goes through, Riverstone will wrap up its books by paying off its bonds, its $66 million in remaining debt, then it would disperse the leftover cash to shareholders.

— Craig Matsumoto, Senior Editor, Light Reading

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lightreceding
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lightreceding,
User Rank: Light Sabre
12/5/2012 | 4:07:03 AM
re: Lucent Gets Riverstoned
or if Juniper is looking at doing something else they could let this deal go through and given Lucent's history they know that another competitor will be swallowed and disappear forever in to the quagmire of Murry Hill.
Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 4:07:03 AM
re: Lucent Gets Riverstoned
So, what do you think? Should Juniper have tried to step in and grab Riverstone?

I suppose they still could, and grab Riverstone in the auction for more than $170M. (Lucent wouldn't say whether they're allowed to up their bid, if that happens.)
Iipoed
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Iipoed,
User Rank: Light Beer
12/5/2012 | 4:07:02 AM
re: Lucent Gets Riverstoned
Foundry already has established credibility in the Metro. Where you been?
light-headed
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light-headed,
User Rank: Light Beer
12/5/2012 | 4:07:02 AM
re: Lucent Gets Riverstoned
#9 They had to buy Riverstone when they found out that their first choice, ungerman bass was no longer available. ;)


PS - you are kidding yourself if you think that the RSTN gear can compete with ALA, Cisco, Juniper or anyone else. 15M a quarter is nothing, nada, peanuts, squat. They have no end to end solution story. No integration story. No subscriber and policy managment story. I guess LU will give them some kind of access story now... of course they had a partnership for a while and it didn't really help. Next thing, you will tell me that Foundry or Extreme is going to be a player in IPTV and metro.
metrokid
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metrokid,
User Rank: Light Beer
12/5/2012 | 4:07:02 AM
re: Lucent Gets Riverstoned
Riverstone is the only manufacter in the market with a technology able to compete with Alcatel and its Timetra boxes. Juniper is getting a niche player just with real products for the core. Therefore Riverstone would be a real option to go into the triple play deploiments. They are already inside of some Tier 1 and has proved that their products work.

If you see the customers where they are and the potential that they could give to Juniper then the answer is easy.
telecom_guru
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telecom_guru,
User Rank: Light Beer
12/5/2012 | 4:07:02 AM
re: Lucent Gets Riverstoned
Another brilliant move by LU. Buying a money losing deal, with a new product line that is not cost effective, that has fallen behind in the MPLS-VPLS technology race, that has the worst executive leadership team ever assembled in the history of start-up land, ...and best of all... LU did it about 18 months too late... did you bother to notice that most of the original innovators are gone to places like JNPR ?

This deserves us starting the LR Article Talk Top Ten Reasons why LU's last ditch purchase of RSTN.PK is a dumb a a#%$ move...

I'll start with #10: They could not re-sell the stuff what makes them think they could sell the stuff?
fiberous
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fiberous,
User Rank: Light Beer
12/5/2012 | 4:07:01 AM
re: Lucent Gets Riverstoned
Shatanu's gamble has paid off. Good job Shantanu!

Riverstone did what is typically called the three
card trick on New York streets. Now you see it,
now you dont. It is very difficult for the player
to get net gains from the dealer in this game.
However, the frst winning is what gets the
player excited.

Riverstone first moved most of the developement
crictical Lucy to India. There they operated
under a different name and without any sign
that even hinted this was a Riverstone opeations.
Something called "crystal...something."
Th senior managers managed Lucy's expectation
and got her hot.

This was not easy. Lucy wanted some specific
things that had to do with the nuances of their
DMX installed based. These features were not
the priorities of their product management folks
in the USA. To get the USA PLM monkeys off their
back the development was moved to India. They
were kept clueless.

The clothes are off and the deed is about to
start. I do feel that Lucy will be unhappy
because eventaully this will be a qucik
withdrawl. The way in which the facade is set s
almost akin to the medicine lasting no more than
an hour and so the exit has to be quick!

For the Riverstone guys this is the window of
opportunity to do a qucik getaway and get this
whole business behind them. Lucy is clue less
and does not know who to manage acquiring this
IP and evolving it further. Obviously, Riverstone
is exactly looking for someone who will let the
people of the hook.

BTW, the whole argument that Riverstone is the
best in Metro Ethernet services is hogwash.
They have good slides, whitepaper, but their system is in bad shape.
AMCC has screwed them like everyone else.
Without your own ASICs this is a tough game to
play against Cisco and Juniper.
The performance issues are bizarre and humourous.

Riverstone is a case where it was good technology
to start with and bad marketing. In the end it
was great marketing and salesmanship and crappy
technology. We see these sort of thing from Bill
Gates' days.
brahmos
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brahmos,
User Rank: Light Beer
12/5/2012 | 4:07:00 AM
re: Lucent Gets Riverstoned
rstn has been hiring like mad in bangalore last few months. they have atleast two rented premises here and a bigger office is being constructed. I did visit and interview with them sometime ago but quickly made an exit from intview process once I saw the sheer physical chaos there. its like 200 people in one room with tiny call center type desks talking and coding all at the same time. add in the cellphone rings and any form of quiet thought is impossible. there were people using conference rooms for offices. best of all the pantry and dining area were in the same large "great hall of the people". and no manager was available to intview me coz "they are all busy with critical customer cases" lol

whoever expects their next gen "bleeding edge" MPLS products to be delivered and supported from the outfit I saw should have nerves of steel. the avg age of the 150 people I saw was < 25 yrs.

I hear bangalore lucent is another temple of chaos and office politics. they should fit right in :-)

eom.
jepovic
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jepovic,
User Rank: Light Beer
12/5/2012 | 4:07:00 AM
re: Lucent Gets Riverstoned
In Business 101 you learn that any business needs focus. You can't do a little bit of everything, because you will be out-competed everywehere.

LU is all over the place already. In almost every field they have a product, but never the best product. This is one of the key reasons they are dying.

The idea that carriers put a great value in buying everything from one vendor is just BS. They look for the best products, preferably from a trusted vendor. Yes, it's nice to keep the amount of vendors low, but that's not gonna make me buy inferior stuff. Look at BT's 21CN - classic cherry-picking!

LU should try to reinforce whatver strengths they have instead - perhaps CDMA or IMS.

Oh, RS a leading metro provider - LOL...
photon2
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photon2,
User Rank: Light Beer
12/5/2012 | 4:06:58 AM
re: Lucent Gets Riverstoned
What you have to keep in mind, is that many of the 'Enterprise' switches actually go into the internal networks of providers, and it's a pretty large number. So when you see revenues of $100M/qtr, and ~20% is supposed to go into SP networks, you have to assume some of that is 'internal' and not used for Ethernet services. Now, having said that, there are some vendors who's shipments to SP's are almost entirely for infrastructure services (Atrica), and this really does not pertain to Riverstone.
photon2
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