LR M&A Strategy Finalists Step Up

So who’s been doing the best wheelin’ and dealin’?

Light Reading editors and Heavy Reading analysts, after burning the midnight oil over some virtual pastrami sandwiches, have concurred on finalists for the Leading Lights Award for Best M&A Strategy.

This award will go to the public company that has consistently demonstrated good timing, judgment, and execution in high-profile acquisitions.

The winner will be announced at our Awards Dinner after Light Reading's Telecom Investment Conference in New York City on December 15th.

In short, the finalists made influential and bold decisions -- with the added benefit of being correct. The judging panel took into consideration the deals that happened in the last three years -- but there was a special emphasis on what that activity ultimately produced in 2004.

Here are our finalists, presented in alphabetical order:

  • Alcatel SA (NYSE: ALA; Paris: CGEP:PA)

    Who knew? Almost nobody expected Alcatel’s $150 million acquisition of TiMetra in 2003 to pay as many dividends as it has (see Alcatel & TiMetra Seal the Deal). It’s now clear that the deal has had a major influence on Alcatel’s IP and multiservice strategy, and the price tag was modest even by today's reduced standards. This newfound IP routing expertise, previously a weak point for Alcatel, definitely helped it win the monster integration contract with SBC Communications Inc. (NYSE: SBC). (See Mais Alors! Alcatel Bags $1.7B SBC Deal .) It also boosted Alcatel’s product portfolio, giving it the valuable IP and MPLS routing technology that resulted in both new products and substantial upgrades to existing products (see TiMetra Shoots for Service Edge and LR Best Product Finalists Revealed). But that’s not all. Alcatel also made a grab-bag of other acquisitions that have helped strengthen its hand: There’s the smallish $27 million acquisition of SIP specialist eDial, the purchase of Spatial Wireless for $250 million, and a couple of IPTV deals including the purchase of iMagic for $30 million.

    Most importantly, none of these deals has given the company a black eye -- everybody’s worst fear when they pull the deal trigger. In short, Alcatel’s M&A strategy overall has been reasonable, methodical, and highly effective.

  • Cisco Systems Inc. (Nasdaq: CSCO)

    Granted, you would expect Cisco to be on this list in any given year, considering its history as an M&A machine. But the recent crop of acquisitions shows some promising new directions and indicates how the company is reshaping itself in the wake of the downturn. Neither P-Cube nor PARC Technologies was all that big -- $200 million and $9 million respectively -- but they give Cisco the power to fortify routers with tools to investigate the traffic stream, giving service providers surgically precise control over how their networks are being used. In fact, whether it was a self-fulfilling prophesy or not, Cisco’s purchase of P-Cube looks to have legitimized the entire traffic management technology market, and Cisco looks to have gotten possibly the best of the bunch.

    Cisco also gets some credit for its $92 million pickup of Procket Networks, which was in many ways a strategic victory by keeping a competitor off the market. Many viewed the purchase as a defensive move, but analysts think Procket's talent pool can help perfect the CRS-1 core router and its follow-up siblings. (See Cisco Plucks P-Cube for $200M, Cisco's Parc Purchase: An MPLS Play, Nokia Expands Indian Hutch, and Valley Wonk: The Procket Puzzle.) The purchase of Linksys, a $500 million buy completed in June 2003 was a bit more in the mold of Cisco’s traditional big-ticket acquisitions. Yes, the deal has lowered Cisco’s margins, but it’s also given it valuable new revenue growth and put it in the home networking market, a place where it could do big things. More importantly, Cisco got its first consumer foothold and a legitimate play in wireless -- so far, the most successful of the six "advanced technologies" that CEO John Chambers sees as potential $1 billion businesses. (See Cisco Buying Linksys for $500M.)
  • Juniper Networks Inc. (Nasdaq: JNPR) File this under: Large Cojones. Juniper’s $4 billion acquisition of NetScreenTechnologies Inc. was more than just a trophy buy; it was a bold bid to move into the security market -- and it took Juniper directly onto Cisco’s home enterprise turf. But the deeper meaning comes as the NetScreen technology starts to merge with Juniper's routers, creating the kind of integrated, intelligent routing device that would help drive Juniper's Infranet initiative. In addition, the acquisition closed in 75 days, by most accounts went smoothly, and is starting to add some revenue growth to Juniper’s numbers.

    Juniper doesn't buy many companies, but so far it’s 2-for-3 (Unisphere and NetScreen worked; Pacific Broadband didn’t), and the two that worked have been huge. In this market, Juniper has shown it’s got about as much courage as anybody to make the high-profile deal, and that’s helped the company grow. The company has now proven it’s not afraid to take on Cisco at its own M&A game by making big purchases and bringing them into the fold quickly. (See Juniper Buys NetScreen.)
  • Tekelec Inc. (Nasdaq: TKLC) Talk about a makeover: Signaling software and gateway vendor Tekelec Inc. (Nasdaq: TKLC) has reinvented itself in the past 18 months with a series of acquisitions in the next-generation voice switching and IP applications sector. Once a sleepy little media gateway company comfortably ensconced in Calabasas, Calif., Tekelec is branching out to see the world -- and it's now bidding to become a softswitching mega-player.

    Our sources tell is that Frederick Lax, a Lucent Technologies Inc. (NYSE: LU) alumnus, is a savvy engineering type who had the foresight to tag softswitching as the next big thing. Consequently, Tekelec has built a Switching Solutions Group by buying Santera, Taqua, and most recently VocalData. This is expected to provide growth as carriers switch over to IP-based switching systems (see Tekelec Tests Softswitch Waters, Tekelec Is Buying Taqua, and Tekelec Connects With VocalData). Tekelec has also recognized the growing importance of IP management systems by announcing its intention to buy OSS firm Steleus (see Tekelec Splashes Out Again).

    So far, early returns are positive, and revenue is indeed starting to ramp, with the company recently posting its first $100 million quarter (see Tekelec Tops $100M). The M&A strategy has paid off for its investors, too: The vendor’s share price has nearly trebled in the past two years to currently stand at $24.25, valuing it at $1.55 billion.

That’s it for the M&A finalists. Stay tuned for more Leading Lights finalists that will be announced today, including the Best Service, Public Company.

— The Staff, Light Reading

  • For more information on the Leading Lights Awards, click here.

  • For more information on Light Reading's Telecom Investment Conference, click here.

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