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Optical/IP

Larscom & Vina: 1 Head Better Than 2?

These days, there may be strength in numbers, as vendors look to feel their way out of the telecom downturn. Thus, two longstanding players have decided to go ahead as one. Larscom Inc. (Nasdaq: LARS) and Vina Technologies Inc. (Nasdaq: VINA) have signed an agreement to merge in an all-stock transaction worth about $6 million.

Small potatoes? Perhaps, at least right now. But both companies are veterans of the telecom space, with solid traction in legacy networking. Together, it's possible their fortunes could take a turn in the right direction.

At least, that's the plan. "This market has too many small vendors," says Larscom CEO Daniel L. Scharre. Together, he says, the companies can realize basic cost savings and tempt carrier customers with a "single source" for broadband access gear.

In many ways, the transition should be relatively smooth, since both offer product lines that toggle together nicely: Larscom specializes in high-speed access devices, such as inverse multiplexers, for service providers and enterprise customers. While only 42 percent of 2002 sales came from service providers, Larscom counts AT&T Corp. (NYSE: T) and WorldCom Inc. (OTC: WCOEQ) among its clientele.

Vina makes integrated access devices (IADs), boxes that combine voice and data access to carrier services in central offices, collocation facilities, or the basements of large enterprises. Vina sells mainly to CLECs and has a sizeable OEM agreement with Lucent Technologies Inc. (NYSE: LU), which uses Vina's gear to add last-mile access for integrated solutions.

The deal also has risks. While billed as a merger, it's being accounted for as a purchase by Larscom, and that company clearly has the upper hand. Scharre is taking the helm of the new company, which will be named Larscom, and Vina's CEO, Michael West, is withdrawing from management, while staying on the board.

The dominance of Larscom could be a hindrance to integrating Vina employees happily. Further, there may be layoffs, as both companies seek to eliminate any overlap. Larscom has 90 employees, Vina 60.

The new Larscom can't afford the delays of a difficult transition. A glance at their respective product lines shows a clear need for more optical connectivity and trendier interfaces -- and fast. CEO Scharre acknowledges the need for an Ethernet service product, for instance, and says that's in the works. Timing will be essential to making the best of the solid technology and customer base each firm has.

There are also the financials to consider. Both Larscom and Vina fell on hard times when the boom busted, and both are trading for pennies on Nasdaq. Larscom's annual sales have dropped by over 50 percent, and it continues to see losses, albeit not as severe as last year's. In 2002, Larscom reported $23.5 million in revenue, with a basic and diluted net loss per share of 26 cents.

Vina reported $25.1 million in revenue for 2002, with a basic and diluted net loss per share of 90 cents.

Ultimately, whether the two companies do better together than apart seems to depend on how well the new entity can meet ongoing downturn challenges and correct the deficiencies that apparently held the original ones back.

At least one analyst is optimistic. "I think it's a pretty good marriage," says Jon Cordova, directing analyst at Infonetics Research Inc. The solid traction of both companies and their respective strengths just might make for an interesting new access company -- if they can get their act together.

— Mary Jander, Senior Editor, Light Reading

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