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Laurel: Startup Holdout?

Light Reading
News Analysis
Light Reading
5/21/2003

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

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changeisgood
changeisgood
12/5/2012 | 12:01:47 AM
re: Laurel: Startup Holdout?
>>Laurel is banging away on customer accounts and looks to have an important multiservice edge routing product.

>>Its only announced customer is Level 3 Communications Inc.

>>So who's left? What about Fujitsu, NEC, Nokia, Nortel ,Siemens for a start?

what a list of losers (incl L3).
light-headed
light-headed
12/5/2012 | 12:01:47 AM
re: Laurel: Startup Holdout?
You guys dont seem to do much analysis. Nokia invested in redback and is the biggest re-seller of the smartedge router. no reason to buy laurel.

No one will pay that much money for a box that is built from off the shelf hw (no custom ASICs) no matter how good the SW.

That said the Laurel product is very good from what i have seen. They need a smaller product to go along with the current 1/2 rack solution.
Honda_Elise
Honda_Elise
12/5/2012 | 12:01:46 AM
re: Laurel: Startup Holdout?

The Allegro Networks box, which is somewhat
similar to the Laurel product, has custom ASICs
and works. Sure, only a few people are still
employed there, but hey, no associated employee
overhead costs!

>You guys dont seem to do much analysis. Nokia >invested in redback and is the biggest re-seller >of the smartedge router. no reason to buy laurel.
>
>No one will pay that much money for a box that >is built from off the shelf hw (no custom ASICs) >no matter how good the SW.
>
>That said the Laurel product is very good from >what i have seen. They need a smaller product to >go along with the current 1/2 rack solution.
xos
xos
12/5/2012 | 12:01:46 AM
re: Laurel: Startup Holdout?
Redback is a more likely candidate for Nokia. Rumour has it that Redback is in the process of restructuring its debt - doing a debt for equity swap, with some help from outside investors. This should be done by July - August timeframe. After this is done, Redback, will in all probability be bought by Nokia.

my 2 cents

xos
lmo
lmo
12/5/2012 | 12:01:45 AM
re: Laurel: Startup Holdout?
I heard a rumour their VP of Sales has left/is leaving the company?? Can anyone confirm? Seems odd if a buyout is in the works...
lightmaster
lightmaster
12/5/2012 | 12:01:44 AM
re: Laurel: Startup Holdout?
IMO,

If the VP of sales is out looking for work, it could mean that he anticipates that his position will be eliminated after a merger and he is trying to do his homework early. It is seldom that a VP of sales survives an aquisition.

If he is leaving now, that would in deed be strange if an aquisition is in the works.
reoptic
reoptic
12/5/2012 | 12:01:44 AM
re: Laurel: Startup Holdout?
250M for a company with one customer with a small deployment at lousy margins? Somebody been drinking too much boom cool aid. The are worth 10% of that at best given normal valuations. However, there are certainly equipment companies wacky enough to pay such outrageous valuations, as recent transactions have demonstrated. Guess they are counting on continued industry dementia.
lightmaster
lightmaster
12/5/2012 | 12:01:43 AM
re: Laurel: Startup Holdout?
reoptic,

I know an example of one startup thumbing it's nose at an offer over a billion just prior to the bubble bursting, then having to settle for a small fraction of that amount later. Cool aide is cheap and abundant.
Kevin Mitchell
Kevin Mitchell
12/5/2012 | 12:01:42 AM
re: Laurel: Startup Holdout?
I believe that Laurel is attractive to entrenched telecom equipment vendors for the following reasons:

1) The edge and overall network convergence are two areas of focus for carrier spending.

2) The only edge start-up left and their router sales are probably equal, if not better than, the revenue from Redback's SE router. While, Laurel has one ANNOUNCED customer, there are probably more.

3) There are needs from telecom vendors: Nortel does not do much with their Juniper relationship and can't create an IP product and Siemens and Ericsson are both marginalized by the Junicent partnership and joint development. As for Fujitsu and NEC, I doubt it, but Fujitsu does have a service and support contract with Laurel now.

As for the $250M+ price for a start-up with revenues probably around $4-5M per quarter, that seems a little silly, but there probably will be some competition for that last start-up in the edge.
skeptic
skeptic
12/5/2012 | 12:01:41 AM
re: Laurel: Startup Holdout?
As for the $250M+ price for a start-up with revenues probably around $4-5M per quarter, that seems a little silly, but there probably will be some competition for that last start-up in the edge.
-----------
The closer Laurel gets to break-even on revenues,
the higher the price will go. I think its still
the case that most of the M&A companies are more
concerned about the impact on quarterly earnings
a money-losing startup can have than the cash
(or stock) purchase price.

But the other thing that Laurel has to keep in
mind is that if the unthinkable happens and
the IPO window opens again, they could do very
well if their balance sheet continues to
improve.

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