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Optical/IP

Force10: Where's the Exit?

LAS VEGAS -- Interop -- After Juniper Networks Inc. (Nasdaq: JNPR) recently spent half a billion dollars snapping up Peribit Networks Inc. and Redline Networks Inc., M&A chatter has turned to who Juniper didn’t buy, rather than who they did (see Juniper Takes Two: Peribit & Redline and Juniper's Kriens Stuck On Traffic).

One name that often enters this conversation is Force10 Networks Inc. Often thought to be one of the potential means for Juniper to enter the 10-Gigabit Ethernet switching market, Force10 has so far been left out of the dance. Is time running out?

Foundry Networks Inc. (Nasdaq: FDRY) launched its new BigIron RX-16 switch on Monday, and that new high-end, fault-tolerant, 10-Gbit/s box further brings Force10's high-end dominance into question (see Foundry Flashes New Hardware). In addition, plummeting prices in Gigabit Ethernet gear point to Force10's biggest dilemma: the longer it waits to take the next logical stop in startup development -- acquisition or IPO -- the more it risks losing its startup edge, as larger public companies catch up in the technology race.

”Right now they have a good competitive position. They’ve been the leader in port density, but their position becomes compromised as competitors catch up,” says Stephen Schuchart, a senior analyst with Current Analysis.

Neither Force10 nor Juniper will comment on acquisition speculation, but Force10 vice president of marketing Andrew Feldman says that the company is being built as a self-sustainable entity, and that it has a "half-dozen" new customer projects in the works. Feldman also downplays concerns about the competition, saying that Force10 uses custom chips while the competition is relying on merchant silicon.

”The highest-caliber customers we have don’t think that 10-Gig is becoming a commodity any time soon," says Feldman. "Density is important, and staying up is important."

But if Force10 is the leader in the 10-Gig market -- and if Juniper is still in the hunt for leading enterprise switching technology -- why hasn't a deal happened? Top Silicon Valley sources say it’s almost common knowledge that Juniper and Force10 have had acquisition talks several times in the past, but that each time these talks have failed because Force10 has been holding out for too much money -- well over $500 million. These sources say that the sticking issue has always been price.

One Silicon Valley venture capitalist points out that because the company has raised and invested so much money in its product, it has no choice but to ask for a big price tag. Force10 hasn’t said how much total funding it has raised, but sources estimate that $200 million to $300 million has been pumped into it. That means investors would likely want at least $500 million to make a tidy profit, and Force10 is believed to be asking for more.

Recent developments may soon bring Force10's exit strategy to the fore again: Foundry’s stock price has lost almost half its value in the past six months, giving it a market capitalization of a little more than $1 billion, which could lead folks to take a second look at it as acquisition bait (see Juniper's Extreme Thoughts Are Back).

Lower prices for public companies would lower the market value for Force10. Meanwhile, heated competition among Force10, Foundry, Extreme Networks Inc. (Nasdaq: EXTR), and Cisco Systems Inc. (Nasdaq: CSCO) is putting further pressure on 10-Gbit/s profitability, bringing the cost of these switching products below $5,000 per port in some quarters.

Analysts say that if Force10 forgoes the acquisition route, it's going to have to survive by building on its customer base in the high-end data center market, at which its product is targeted, and by trying to charge a premium price for its own ASICs. But how big is the market? And how quickly could Force10 become profitable?

"They've got the high-end data center play, but it could be a very limited market," says Current Analysis's Shuchart.

Force10's Feldman laughs off this notion. Feldman notes that Force10 currently has 120 customers. "The addressable market is 3 to 4 billion dollars," he says.

— R. Scott Raynovich, US Editor, Light Reading

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OpticOm 12/5/2012 | 3:16:30 AM
re: Force10: Where's the Exit? I worked in the past for a couple of high flying start-ups, which refused some decent acquisition proposals, hoping for a "Cerent" type of deal, only to die later during the nuclear winter....
truthteller99 12/5/2012 | 3:16:29 AM
re: Force10: Where's the Exit? He sound like arrogant SOB. After comment on India jobs, and then this article.
F10 managment too arrogant to sell. They IPO or die.
OpticalHannibal 12/5/2012 | 3:16:26 AM
re: Force10: Where's the Exit? I agree. Feldman is a cartoon. His statements on India jobs is classic.

I quote "Force10 is not laying off workers, but we informed a group of engineers that their function would now reside in India". I thought of sending this to Bill Mahr.

Isn't it called a lay-off Andrew ??? It's like John Kerry's statement "I voted for 89 Billion $ for Iraq war, before I voted against it" BTW, Kerry is million times smarter than Feldman.

Feldman's contribution to Force10 is, changed the logo of the company in the first month. Till date, that's all he did.

haNNibal
paolo.franzoi 12/5/2012 | 3:16:20 AM
re: Force10: Where's the Exit?
A 10GigE switch was a logical progression, so the systems company that jumped on that bandwagon has a defined period of time until established competitors catch up. That window is the entire value of the startup. After large players jump in and prices commoditize there is no value left. So, Force10 has probably already missed the value window for itself.

Can an IPO occur? Maybe, but I certainly would not buy the stock.

Will somebody buy the company? Yes, but not at a great multiple. If $300M was sunk in, then the company should take a break even exit. The alternative is worse.

seven
ironccie 12/5/2012 | 3:16:20 AM
re: Force10: Where's the Exit? If f10 silicon is what introduces all the variations in packet arrival times not available from their competiton, they can keep it.

IronCCIE
OpticalHannibal 12/5/2012 | 3:16:19 AM
re: Force10: Where's the Exit? Problem with Force10 management is they think too much of their product. They need to be reminded it is just a switch. There is no innovation there. I have a 1 GigE Linksys switch at home and what they are selling is souped up 10 GigE switch, that's it. They could have grabbed Juniper deal. For very obvious reasons they rejected it.

The chip advantage they have is fast losing. They skipped schedules for more than a yr to deliver the next generation chipset. They screwed it up big time there.

There are quite a few companies Marvel, Broadcom coming with integrated chips for their Buffer manager and packet processor. It is lot cost effective to go with BRCM or MRVL chips than making ones own. Then what do they have.

Heard they stopped working on their next generation chipset. Their chip engineer resumes are every where. Morale of the team is low. It is a sitting duck.

With the revenue stream far less than EXTR & FDRY (margins not known) I would buy for not more than 150 mil. If they were to go public, market cap would be the same.

haNNibal

ether420 12/5/2012 | 3:16:19 AM
re: Force10: Where's the Exit? Isn't this the same guy who helped drive Riverstone Networks to the great success it is today?
OpticalHannibal 12/5/2012 | 3:16:18 AM
re: Force10: Where's the Exit? Yes, indeed he is the same guy. He came to Riverstone through Yago. In Yago he made it big by sucking Piyush Patel day-in & day-out. That's Feldman's contribution at Yago.

I don't know how he made it to Stanford. He is not an impressive guy, certainly not his resume (leaving the Stanford part).
exF10Guru 12/5/2012 | 3:16:17 AM
re: Force10: Where's the Exit? Outsource CEO and Managment staff to india as part of the outsource drive. Then merge with Aruba to create a total enterprise soluion.
OpticalHannibal 12/5/2012 | 3:16:15 AM
re: Force10: Where's the Exit? F10 has a management, which talk the talk and dont walk the walk. I think investors, has to knock this management team and bring in new team with solid engineering and sales experience to head the company.

Till last lay-off, virtually engineering team is coerced to work on weekends and late evenings, with scant respect to invidual's time and space.

F10 has a CEO, who loves his weekends so much that he has his car registration, which says it all.

F10 had a VP Sales, who says we have one more semester left to graduate and one needs to work hard to get there. That one semester is perenially there from last two years.

F10 has a VP Eng, who thinks of projects before he goes to bed and wakes thinking about them and do nothing more, but expects every one else to spend their time and energy.

If you take a vote among the F10 employees, who would work for a new company with this management team, they don't get more than a handful.
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