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Genband Takes Tekelec Switch Biz

Genband Inc. has agreed to buy Tekelec 's switching business for $1 million in cash, a stake in Genband, and the assumption of some of Tekelec's liabilities, both companies announced this evening. Light Reading first reported March 14 that the two firms were in talks and very close to a deal. (See Genband in Switching Biz Talks With Tekelec.)

In little more than a year, Genband has shortened its name, revamped its marketing, and acquired Syndeo, BayPackets, and some switching businesses from Siemens. (See GenBand Buys Siemens Unit, Genband on the Run, and Genband Splashes Out for BayPackets.) Now the company is saying it will be profitable and won't choke on Tekelec's 465-person business unit, which once existed as three separate companies.

The deal will take Tekelec's switching solutions business, which includes Tekelec's acquisitions of Santera, VocalData, and Taqua, and put the whole enchilada under the management of Genband CEO Charlie Vogt. Vogt held executive roles at Santera, was the CEO of Taqua when Tekelec bought it, and was instrumental in helping Tekelec buy VocalData.

"You could see this as a case where we get to finish what we started," Vogt says.

Tekelec will now be a shareholder in Genband. Genband gets the equity interests in "Santera Systems LLC and Taqua, Inc. and the SSG business assets of Tekelec." Tekelec gets a 19.9 percent common equity interest in Genband, $1 million in cash, and Genband's "assumption of certain SSG [switching solutions group] liabilities," Tekelec announced this evening.

Tekelec added that in connection with the deal, it "expects to record a net loss after tax on a GAAP basis of approximately $55 million to $70 million."

Plano, Texas-based Genband has about 200 employees now. Vogt says there will be an "all hands" meeting with both groups on Thursday to discuss how large a company the new Genband will become. "Clearly not every employee that's a part of the two companies will be a part of the new company," Vogt told Light Reading in an interview today.

Vogt also puts down the idea that buying a money-losing switching business from Tekelec will put Genband off its track to profitablity. "When you're a venture funded company, you don't have that luxury," he says.

"We will be profitable before year end," Vogt adds.

Vogt describes the new Genband as the application server and gateway vendor of choice for VOIP and IMS networks. They won't go after the signaling market nor the softswitching pure plays.

What the new company will do is continue to build on its existing businesses, which Genband claims includes 500 telecom service provider customers worldwide, with a smattering of those being cable MSOs or wireless providers.

Vogt says Citigroup represented Genband in the deal and is very much on board with getting the company public. "They see a clean path to an IPO as early as Q1 next year," he says.

Before adding the Tekelec bits, Genband was on track to book more than $40 million in revenues this year. The company declined to give any current post-acquisition projections.

Analysts say Tekelec's switching business booked about $110 million in revenue last year, with a large chunk of that coming from Alcatel-Lucent (NYSE: ALU). Genband's Vogt doesn't seem worried about Alcatel (a Genband investor) taking a sour view of the deal. "We have a very strategic relationship with Alcatel, and I think it will become bigger and stronger," Vogt says.

Tekelec shares were up $1.08 (7.99%) to $14.60 in trading on Tuesday.

— Phil Harvey, Managing Editor, Light Reading

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MorningWd 12/5/2012 | 3:11:48 PM
re: Genband Takes Tekelec Switch Biz So if I'm reading this article properly, it looks like Genband gave up ~20% of their company and $1M in cash for TKLC's VoIP play.

In this article, http://www.lightreading.com/do...,

LR staffers thought that TKLC was going to have to pay $25M to shut it down after failing to secure a $25M offer for the assets.

If we assume that the $25M offer would have still been acceptable to TKLC, does Genband think that 20% of their company is worth only $26M? If that's the case, it doesn't sound like a high-flying company I'd put money into. Does anyone know what their total investment level is to date?

jumpintownlake 12/5/2012 | 3:11:47 PM
re: Genband Takes Tekelec Switch Biz GENBAND has had over $240 million in equity investments since inception. The last round came late in 2006. This is just GENBAND and doesn't count the other aquired entities.

The trick here is going to be a lot of product rationalization, and to cut the expense line very quickly. Management thus far has fared poorly in their other acquisitions, never approaching the published numbers used to justify the deals. It's a difficult proposition to take a set of products that didn't even merit a blip on a competitors radar screen and turn them around quickly.

This is not unlike catching a falling knife, as revenues roll off on the acquired products (if there was any in some cases) and matching expenses to get to profitability.

I would guess they have something north of $25M in cash, but the burn rate is going to go way up as they company will probably at least double in size, if not more.

The race will be interesting to watch. Can they clean this up and get profitable before burning up the cash?

Place your bets...
palaeozoic 12/5/2012 | 3:11:47 PM
re: Genband Takes Tekelec Switch Biz
With $500 million in his back pocket, Zhone's Mory E. set out to build a powerhouse by buying up industry orts. Unfortunately he found that orts are orts for a reason. With a market cap under $200 million (and this is after raising a lot more money and giving up half the company to Paradyne shareholders), I'd say the experiment failed.

With a lot less money, Charlie V. is trying to succeed where Mory E. failed. Unfortunately, he will find that Mory didn't fail for lack of effort; he failed because the strategy was flawed.


eyesright 12/5/2012 | 3:11:46 PM
re: Genband Takes Tekelec Switch Biz If there is no cash in this deal for GENBAND, it spells trouble. With a capital T as big as Texas.

Even Tekelec had trouble funding this R & D monster. Cutting heads is easy...cutting the right heads is the hard part. One would assume that GENBAND management has enough familiarity with the Tekelec switching division to have some sort of a roadmap to integration. However, given their past record with acquisitions this does not inspire confidence on their decision or due diligence processes.

Pretty easy to see a senario where GENBAND rips through current cash in the calendar year and closes.

Initial glance looks like Tekelec managed to really minimize their exposure and shed a cash monster off their balance sheet. The key item will be the details of the "assumed liabilities" by GENBAND.

I would say that after three innings it's:

Frank 2 CVC 0

Play ball!
DCITDave 12/5/2012 | 3:11:46 PM
re: Genband Takes Tekelec Switch Biz Good points. There was no direct equity investment in Genband by Tekelec.

We'll wait for the filing to see how the deal's particulars are spelled out. But...

The two companies did say Tekelec would so some restructuring of the group B4 Genband got its mitts on it. So the filing will really be key in figuring how much chaff comes with the wheat (or vice versa).
eyesright 12/5/2012 | 3:11:46 PM
re: Genband Takes Tekelec Switch Biz If I read this correctly it appears that Tekelec took $1M cash and 19.9% of GENBAND stock for the switching assets. This would imply no additional cash investment in GENBAND by Tekelec. Can someone verify this?

If this is so, the axe will swing early and often in a number of places. GENBAND will have to move very quickly to shutter some existing product lines (on both sides) and reduce staff to conserve cash as the current GENBAND is not profitable, and assumption of 465 new headcount in an already upside down business won't help this.

Can't wait to see the Tekelec filing on this, should make for interesting reading.
whatyadontknow 12/5/2012 | 3:11:45 PM
re: Genband Takes Tekelec Switch Biz Wow...I cannot wait to watch this unfold, TKLC thought it lost money, hold on Citibank....
MorningWd 12/5/2012 | 3:11:43 PM
re: Genband Takes Tekelec Switch Biz If Alcatel was smart, since the G6 is an integral part of their FTTH solution, they would wait for the pending implosion and pick up the gateway piece for a song. Of course, they bought Lucent, so we all know that they aren't smart.
theanswer 12/5/2012 | 3:11:42 PM
re: Genband Takes Tekelec Switch Biz I agree with one of the previous postings that cutting heads is easy but cutting the right heads is difficult. This is especially true if the person or persons doing the cutting, hasnGÇÖt a clue about the talent levels down in the trenches. With 50% of the workforce staff rumored to be cut we can only wonder if those overpaid employees that are retained will have their salaries adjusted. This is not a startup environment anymore. The manufacturing group is legendary for losses and it will be interesting if they retain the same model and personnel.
trzwuip 12/5/2012 | 3:11:39 PM
re: Genband Takes Tekelec Switch Biz The funniest thing that I haven't seen yet: Charlie Vogt got the CEO job of GenBand after flipping Taqua to Tekelec for way more than it was worth. Now he buys it back plus Santera for a song with the task flipping it all over again. If anyone buys any of this crap set of products (I liked the comparison to Zhone, having had the same thoughts prior to reading it here) then shame on them! Whether it be an IPO, purchase, or even a purchase in bankruptcy, whoever puts more money into this set of crap products and mediocre people will get exactly what they deserve. I feel for the customers getting screwed by buying on price only to end up paying more in the end... "What you pay for is what you get" still holds true...
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