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M&A's New Currency

Light Reading
News Analysis
Light Reading
1/30/2004

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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FISH
FISH
12/5/2012 | 2:32:52 AM
re: M&A's New Currency
Nortel should buy ARRIS !
particle_man
particle_man
12/5/2012 | 2:32:52 AM
re: M&A's New Currency
That would be good advice if there were any way to examine executive ratings on rolostar. If you guys are going to spam the LR message boards, you should at least know what your product does.
OpticOm
OpticOm
12/5/2012 | 2:32:51 AM
re: M&A's New Currency
What for?
That's a dead company anyhow...
sevenbrooks
sevenbrooks
12/5/2012 | 2:32:49 AM
re: M&A's New Currency
Its a joke, Nortel owned part of Arris....

seven
rbkoontz
rbkoontz
12/5/2012 | 2:32:46 AM
re: M&A's New Currency
LR, let's shed some light on the skeletons in these start-up closets:

Calix - yes, working their way through Nortel partner program for Sprint. They are a strong acquisition candidate for someone and best of the bunch - based on limited success with the IOCs. But their product is no where near ready for large account quality according to several major carrier lab trials. Biggest acquisition concerns include retention of the mgt team - same ones who bailed Cerent shortly after the acquisition, and employees who have endured 4 years of sheer hell and looking for a pay day and exit. Likely they have good reason to bail as all the tier 1 account lab trials indicate the product is no where near reliable enough to make it. And engineers love to clean up bad code you know... Russo has the pedal to the metal to generate bookings and revenues while sacrificing long term strategy. He is putting lipstick on this pig and hoping someone will write a check big enough to satisfy his ego. Prediction: sold to Ciena for $150M after Ciena walks out on Catena at the alter - see below.

Catena - great little SLC 5 retrofit card, but the new system BLC product is no where near ready or competitive - even 3 years after it was launched. Catena has zero significant customers for their system product for a reason. Prediction: Ciena takes them to the alter and bails after product diligence. Remaining SLC 5 line card biz sold to Adtran for $50M.

Occam - getting lots of attention from IOCs these days for great slidewear and trials. No they have to deliver and scale to carrier sized networks and traffic loads. Only a real lab trial by a big customer will whether they are for real of memorex. Prediction: Can't get revenues above $5M/qtr and are taken out by a public ethernet vendor who knows too little about the access network to see their limited capability - my guess is Extreme or Foundry or Riverstone - for $75M.

Zhone - nothing but a telecom junk yard dog here. 4 years and $500M have netted no measurable customer wins for new system BLC products (sorry, CLECs don't count any more Mory). Prediction: with $15M cash left, they burn through the remainder and fail to convince the VCs to fund Mory's failure any further. Chapter 11 baby. In a bizarre twist, Mory buys his own assets back for $200,000 , eliminates those pesky shareholders and starts it all over again.

Allied Telesyn - Group of enterprise data guys trying to build a carrier product. Their addressable domestic market is capped with the smallest, most experimental IOCs. Telesyn Japan takes 12 months to find the limits of the product and team before shutting it down.

Entrisphere - Great slidewear but no product (even announced!) yet. Horribly trailing their competition above in development. Even Fujitsu geniuses can figure this out. Prediction: gets a highly dillutive round in late '04 dependent on revenue milestones, but can't achieve and shut down in early '05.


fudbuster
fudbuster
12/5/2012 | 2:32:25 AM
re: M&A's New Currency
Most Wanted, with all due respect, this is nothing but pure unadulterated FUD.
BobbyMax
BobbyMax
12/5/2012 | 2:32:23 AM
re: M&A's New Currency
Merger and Acquisitions seldom work regardless of the motivation the motivation. The mass acquisition of companies was "pioneered" by Cisco in an effort to raise its stock prices abnormally high. The reasons behind merger and acquisitions often remain in the background and the full facts are seldom known.

It is too dangerous to acquitre VC funded companies as one is expected to pay much more than they are worth. Many prominent companies such as Lucent, Nortel,Cypress, Nokia, Alcatel, Siemens, Ciena and Motorola have tremendously suffered by their excessive acquision activitties
whyiswhy
whyiswhy
12/5/2012 | 2:32:14 AM
re: M&A's New Currency
"Calix - .... Russo has the pedal to the metal to generate bookings and revenues while sacrificing long term strategy. He is putting lipstick on this pig and hoping someone will write a check big enough to satisfy his ego. Prediction: sold to Ciena for $150M after Ciena walks out on Catena at the alter - see below."

Calix (and the rest): All their customers know their investors are on the verge of throwing in the towel, but they can be used as an irritant for the major players to keep prices low. Always at the altar, never getting married. As long as the investors pony up, the Tier 1 boys will whisper sweet nothings, and buy as little as they can.

Any large aquirer is a competitor and has to believe for any of these guys going into Chpt 11 they get rid of an irritant and take over any business anyway, so why pay much of anything at all?

-Why
truelight
truelight
12/5/2012 | 2:32:01 AM
re: M&A's New Currency

KPSmells -get lost ps\osting here.

Forget Rollostar they are run by Vinay Kumar - Indian. Your name and details are likely going to end somehwhere you do not to be plus all your compnaies information and products. This is just a front for a scam to sell other services.

Do not be fooled by this type of company.

corvisalum
corvisalum
12/5/2012 | 2:31:58 AM
re: M&A's New Currency
LR:

Now that you have erased BMax, can you do the same for KPSmells - his postings are pure scam and lead readers to a website which is completely irrelevant.

ca
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