Optical/IP Networks

Lucent Buys Softswitch Vendor Telica

Lucent Technologies Inc. (NYSE: LU) answered quite a few questions about its softswitch strategy today by acquiring startup Telica Inc. for $295 million in stock and options (see Lucent Buys Telica for $295M).

Lucent has been criticized in the past year for a lack of focus in the next-gen voice systems arena, and has changed direction on a number of occasions (see Russo's VOIP Spin Confounds and Lucent Performs Softswitch U-Turn). This acquisition will give Lucent a more identifiable product set and should clear up any misgivings about the vendor's commitment to the softswitch market, where major rival Nortel Networks Ltd. (NYSE/Toronto: NT) has built a strong position.

The financial market responded positively to the news, with Lucent's share price rising by 7 cents, about 2 percent, to $3.26. The deal is expected to close by the end of Lucent's fourth quarter on September 30.

Telica is one of the leading competitive softswitch startups providing Class 4 and Class 5 replacement switches and has more than 50 customers (see Telica Announces 8 Customers). According to Synergy Research Group Inc., it ranked fourth in the U.S. market for carrier VOIP systems in the first quarter of 2004, trailing only Nortel, Sonus Networks Inc. (Nasdaq: SONSE), and Cisco Systems Inc. (Nasdaq: CSCO).

That success has helped it into Light Reading's list of the Top Ten Private Companies in the telecom sector (see Light Reading Exposes Privates and Telica). Telica, we noted earlier this month, was "ripe for an 'exit' of some sort in the coming months," following rumors of either an acquisition or a potential IPO.

We also noted that Telica was heading for annual revenues this year of between $30 million and $40 million, which, at the higher end of that range, puts the Lucent acquisition at nearly eight times annual revenues. In a conference call today CFO Frank D'Amelio would say only that Lucent regarded the price as "fair." As a comparison, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) last week paid about five times annual revenues for access equipment player Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI). (See Investors Deprecate AFC-Tellabs Deal.)

Lucent will exchange 92.7 million shares of common stock and options for all of Telica’s equity, and make cash payments to Telica's 250 employees. D'Amelio dodged a question about how much those payments would amount to. He did, though, note that there are two sets of payments: one to be made to all employees, and one to "key employees" that would encourage them to stay with Lucent.

That at least provides some good news for Telica's employees; and its investors should be smiling, too. Between them, Highland Capital Partners, Oak Investment Partners, Prism Venture Partners, Nassau Capital LLC, and Bessemer Venture Partners have pumped in about $120 million.

As for Lucent, it'll be hoping Telica's technology can give it a fighting chance with the Tier 1 carriers, especially its existing circuit switch customers, as they migrate to converged networks.

One such operator is Verizon Communications Inc. (NYSE: VZ), which earlier this year awarded a VOIP infrastructure deal to Nortel (see Nortel Soars on Verizon VOIP Deal). At the time, Lucent noted that Verizon had not completely excluded it from its next-gen network plans but had given it 18 months to come up with a strategy for replacing its own installed base of Class 5 switches. The Telica acquisition could give it the technology it needs to convince the likes of Verizon.

In a conference call today, the president of Lucent's Integrated Network Solutions (INS) business, Janet Davidson, said Lucent's carrier customers had praised Telica, and that the startup had been "stiff competition" in a number of RFPs. "That helped us identify Telica as a company we wanted to join up with," she stated, but added that she couldn't comment on Verizon or any other individual customer.

She added that Lucent decided to buy rather than build the capabilities Telica brings "because time to market is critical, and that was a major driver. Carriers are issuing RFPs and deploying equipment now."

Lucent CEO Pat Russo added that it was critical for Lucent to get a position in the market for converged network infrastructure now, as "over time VOIP and SOIP [networks] will replace circuit-switched." SOIP? That's "services over IP" for the acronym watchers among you.

"From my standpoint, the decline we have seen from circuit-switched sales will be replaced by revenues from the transformation to next-generation networks," said Russo. "This acquisition is about augmenting our portfolio and strengthening our hand."

So how exactly will Telica "augment" Lucent's existing VOIP system portfolio? After all, Lucent already has a softswitch and media gateways as parts of its Accelerate portfolio (see Lucent's VOIP Group Gets a Boost, T-Com Picks Lucent for VOIP Trial, and Lucent Helps BellSouth With VOIP).

The main answer appears to be scale and a distributed architecture. Telica has developed a next-gen solution, called Plus, which comprises its Media Gateway Controller (or softswitch), Plexus 9000 Media Gateway, and the Plus Signaling Gateway.

Lucent says Telica's Plexus 9000 Media Gateway, which supports 21,500 ports, will be offered to carriers alongside its existing 8,000-port Universal gateway and the PSAX multiservice gateway, which is used mainly in wireless backhaul setups.

Telica's Signaling Gateway, meanwhile, fills a hole in the current Lucent portfolio because it has been designed especially for the sort of efficient, distributed architecture that softswitching setups allow.

As for the core softswitch, which according to Telica can support networks of more than 500,000 ports with a single chassis, Lucent plans to integrate this with its existing softswitch functionality "as appropriate," according to a Lucent spokesman.

Lucent says it will provide more details once the acquisition is closed and integration complete.

While this might help Lucent out of a hole technically, doubts will remain about the vendor's ability to take advantage of Telica's strengths. Lucent has often been criticized for failing to make its acquisitions work, with Chromatis Networks, Ignitus Communications, SpringTide, and Nexabit being some of the more high-profile flops (see Lucent Silences SpringTide, Whatever Happened to X?, and Lucent Faces "Exodus of Nexabit Staff").

— Ray Le Maistre, International Editor, Boardwatch

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