Laurel: Startup Holdout?
Laurel Networks Inc. is playing hard to get, according to industry sources.
The edge-routing startup has entertained several acquisition offers, but it wants more money, say the moles. What will it take to take out Laurel? $250 million to $300 million, according to some estimates.
The market in time will determine whether Laurel's leaders are crazy or smart. In the meantime, Laurel is banging away on customer accounts and looks to have an important multiservice edge routing product.
Laurel, which has raised over $77 million in two rounds of funding, has been doing well against competitors, supposedly even beating Cisco Systems Inc. (Nasdaq: CSCO) out of a few accounts. Its only announced customer is Level 3 Communications Inc. (Nasdaq: LVLT), but there have been rumblings that it's won a deal with AT&T Corp. (NYSE: T).
Acquisitions seem to be back in vogue. Last week, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) announced that it was buying Vivace Networks for $135 million (see Tellabs Snags Vivace for $135M); and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) said it was buying TiMetra Networks for $150 million (see Alcatel & TiMetra Seal the Deal). Ciena Corp. (Nasdaq: CIEN) announced back in April that it was buying WaveSmith Networks Inc. for $158 million (see Ciena Nabs WaveSmith).
WaveSmith’s last round of funding announced back in October 2002 left many of the original investors with heavily diluted shares (see WaveSmith Gets $30M, Signs With Ciena). Most investors appear to have broken even on the Ciena deal, but it's doubtful that anybody had a home run.
TiMetra, the last deal to go down, offers evidence that the M&A climate is improving. The company had raised about $50 million in venture money, and it was sold for $150 million before even launching its first product, indicating that early investors may have seen as high as a 3x return on their investment.
The recent deals also point to edge routing as a hot spot. Laurel, TiMetra, WaveSmith, and Vivace all have products that can handle multiservice applications.
“There is an expectation that carriers will begin increasing their capex spending again sometime in late 2004 or early 2005, and the incumbent vendors are looking to fill holes in their product lines in anticipation,” says Stephen Diamond, general partner at the Sprout Group. “The edge of the network will be where most of the action is over the next couple of years.”
So which companies are looking to buy IP edge startups? Alcatel, Tellabs, and Ciena have already chosen their dance partners. Lucent Technologies Inc. (NYSE: LU) also made its pick when it announced its partnership with Juniper Networks Inc. (Nasdaq: JNPR) (see Lucent Partners With Juniper). Laurel was recently said to be talking to Marconi Corp. plc (Nasdaq/London: MONI) over a possible OEM deal, but experts agree that the debt-saddled Marconi would not have the cash nor the stock value to cover Laurel’s asking price (see Marconi and Laurel in Talks ).
So who's left? What about Fujitsu Ltd. (OTC: FJTSY), NEC Corp. (Nasdaq: NIPNY), Nokia Corp. (NYSE: NOK), Nortel Networks Corp. (NYSE/Toronto: NT), or Siemens AG (NYSE: SI; Frankfurt: SIE) for a start? There's also speculation that Juniper might be interested.
Nokia's name seems to come up whenever startup edge routers are the talk of the town. Its $421 million acquisition of Amber Networks back in July 2001 turned out to be disappointing when the ASR2020 edge router based on the Amber technology was cancelled earlier this year (see Nokia Kills Amber Router). The company’s internal R&D to build an edge routing platform has not produced a viable product, either, say sources.
Laurel isn’t the only edge routing player that could be looking for a buyer. Riverstone Networks Inc. (Nasdaq: RSTN), which makes IP routing and Ethernet switching products, may also be on the block. With the stock now trading around $1.45 a share, with prospects of an SEC action in the background, sources say it's been shopping itself around.
— Marguerite Reardon, Senior Editor, Light Reading