Optical/IP Networks

M&A's New Currency

In the access space, there's currently enough merger and acquisition talk to choke a horse. [Ed. note: That's a lot, in case you're wondering.]

First, there's word in the venture capitalist community that Nortel Networks Corp. (NYSE/Toronto: NT) has been on the hunt for smaller companies. "Nortel has been knocking on doors," says one VC, who asserts that a company in his portfolio was approached.

At least two sources – one close to Nortel, and one at an access vendor – have put Calix Networks Inc. and Nortel working on something. Others in the access space say that it could be something as benign as Calix working through Nortel's developer's program in hopes of winning some access business at Sprint Corp. (NYSE: FON) or Verizon Communications Inc. (NYSE: VZ), two carriers that are embracing packet voice networks, buying Nortel gear, and looking to expand their access networks in a way that incorporates VOIP (see Nortel Soars on Verizon VOIP Deal).

But why would Nortel care to get back into M&A, given how destructive a force it was for them between 2000 through 2002?

"The value of their currency – their stock price – is going up, and their customers are driving them to add more pieces to their overall solutions," our VC source says. "They're buying for different reasons now than they did back then."

Not only has Nortel's stock price improved – it rocketed up $1.24 (18.84%) to $7.82 today – but its cash position is as good as it has been in years. In its earnings call last night, the company boasted of having $4 billion in cash and investments, up from $3.6 billion at the end of the third quarter of 2003 (see Nortel Scores in Q4).

And, of course, it's always possible that Nortel, which abandoned the access space when it sold its DLC business to Zhone Technologies Inc. (Nasdaq: ZHNE) (see Zhone Acquires Nortel's Access Gear), may be looking to re-enter, but with newer technology.

Calix won't confirm or deny the speculation, though it has been putting a bow on its business lately (see Calix Boasts Market Leadership and Calix Ships to 100th Customer). "From the beginning, we've tested our equipment against anything we have to connect to," says Kevin Walsh, Calix's VP of marketing.

Even more than Calix, Catena Networks Inc. is cropping up often in M&A chatter.

Rumors have the company attracting attention from at least two suitors – Ciena Corp. (Nasdaq: CIEN) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). Both potential buyers have this in common – their core market is slow-moving, has been so for years, and likely won't see the kind of growth that the access market will experience in the next three to five years.

Tellabs, an early Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) investor, made overtures to AFC a while back (see Tellabs Angling for Access – and AFC). Nothing came of that possible pairing, but it does show that the company, despite needing a CEO, is anxious to get into the access space. And Catena, though still lacking some big system sales, is looking okay on paper.

Catena, in fact, says it has 260 employees, has raised $192 million to date (with its last round coming in January 2002), and hauled in $52 million in revenues in 2003. A source close to the company, who asked not to be named, says that Catena, too, is expecting to bring in about $100 million in revenues in 2004.

The company has also been known to be in partnership talks with various vendors, which is just the kind of activity that always throws fuel on M&A speculation.

Catena declined to comment on the speculation.

And what of Ciena? Ciena has made the M&A rumor more than once or twice. It has been said to be sniffing at Catena for a while now (see Ciena May Be Eyeing Catena), after making investments in Laurel Networks Inc. and Luminous Networks Inc. late last year (see Ciena Links Up With Luminous).

The upshot of all this is that the potential growth of the access network seems to have some vendors airing out their wallets a bit. They may be ready to spend soon, if pushed by a customer or the opportunity to buy their way into an account, a la AFC and Marconi Corp. plc's (Nasdaq: MRCIY; London: MONI) North American access business (see Access Acquisition Boosts AFC).

"Anybody with a big enough wallet can place an offer down that a senior management team could not ignore," says a top executive at one access equipment company.

— Phil Harvey, Senior Editor, Light Reading

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