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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douggreen 12/5/2012 | 2:30:51 AM
re: M&A's New Currency Geoff,

Cisco in fact bought 3 LAN switch companies (including Grand Junction). At least part of the reason that they bought Kalpana was defensive. IBM had an outstanding offer in stock that Cisco countered in cash. Most of us who knew the situation believed it to be almost totally defensive.

In fact, aquisitions are often a mixture of offensive (to get the product) and defensive (to keep competitors from getting them).

A third reason for aquisitions is product drag (e.g. selling more routers because you have LAN switches, etc.).

A fourth... getting into new markets. Part of Cisco's reasons for buying Cerent was to get the product and revenue, but it also got them entry into the regulated side of the carriers.

All of these factors make it hard to judge the success of some aquisitions because success can be measured on many fronts. However, one can certainly find a lot of obvious failures, as some have pointed out on this board.
whyiswhy 12/5/2012 | 2:31:00 AM
re: M&A's New Currency Sorry and gald at the same time to see from your posts that you "still believe" in virtuous business principles. But the truth is that in many, many M&A cases, the "real" reason is as I stated: inside dealing.

This explains why the acquistion rarely works out. There is no incentive post-merger that compares to the "shower" everyone involved gives themselves within 90-180 days of the closing of the deal. Why bother making it work longer term that that?

Look at all of KK's acquistions at JDS...how many are still there? How relatively rich is JDSU? How relatively rich is KK?

I would say KK is doing 1000% better relative to when he started at JDSU than JDSU is from when he started.


gbennett 12/5/2012 | 2:31:06 AM
re: M&A's New Currency Comrades,
On a slightly different point...why do we think that so many acquiring companies tend to make so little of their acquisitions after they've done the deals? Jeez, I mean they've spent a fortune on this company, you'd think they'd want to make the best of it.

I have a half a dozen examples I can recount from internal experience, but I'd prefer not to name names :-) By the way, one of you asked whether acquiring companies use any kind of internal index to measure the wisdom of their acquisition decision. My guess is they don't. Executives hate to be reminded of the magnitude of their mistakes :-)

gbennett 12/5/2012 | 2:31:06 AM
re: M&A's New Currency Comrades,
Some very interesting comments from you on this thread. Maybe I can summarise by re-stating some of the points...

- Acquisitions donG«÷t just happen for the obvious reasons G«Ű technological or commercial G«£time to marketG«•. There are G«£strategicG«• and G«£accountingG«• reasons.

- Strategic reasons may include shedding "bad feelings" from previous efforts in this space.
- Accounting reasons seem to be a symptom of the VC expectation. In other words, the acquiring company needs to retain the highest level of profitability, and can't afford to endanger this by too many internal development projects - even if these projects would have been cheaper in the long run. Accounting rules like "pooling of interest" and the ability to write off goodwill are contributary factors.

- Acquisitions can be made for defensive reasons. Perhaps a company needs to "take out" a young upstart before it becomes too much of a problem.

One conclusion I would draw is that there is a serious problem with the internal development framework in western companies. If internal politics can scupper an otherwise well-thought-out project, this is a problem. If lack of willingness to invest in internal projects is overshadowed by an almost reckless need to "do a deal" for an acquisition, then this is a problem. If, as one of you has suggested, it is difficult to motivate an internal team to think out of their existing box (both literally and metaphorically) then this too is a problem.

I also wonder if there isn't something of the macho mentality about acquisitions. With our modern veneer of civilisation, maybe this kind of activity is the equivalent of the old "rape and pillage" of the Dark Ages? I definitely remember remarks a couple of years ago that Juniper "couldn't possibly be all that successful as they haven't acquired anybody". There was me thinking Juniper was as successful as it was precisely because it hadn't wasted its time and (shareholders') money acquiring anybody. Judging by the strutting that typically follows an acquisition, I definitely think there's something to this idea.

As we start to see some recovery in the markets, it looks like we're also beginning to un-learn the lessons we all said we'd never forget about the past couple of years - you know, the ones about sensible P/E ratios and stuff. If companies are gearing up for acquisition fever once again then I suspect we'll also see a return to nonsensical acquisition bids.

uno04 12/5/2012 | 2:31:09 AM
re: M&A's New Currency >>So why would anyone ever acquire a products or technology vs organic development.

It has come to the point where in-house development (whether there is man power or not) is not appealing to the board and the management. The baord and the management would rather let good and hardworking people go and do a buyout than develop anything new inhouse. Also, even if the M&A has proven to be a total failure, the business cycle is so long, it gets forgotten and there is no accountability at all.

Can anyone tell me any of the following M&A have brought anything to the buyer:

But for the stock holders, do any of the people who made the decision got affected?
PO 12/5/2012 | 2:31:09 AM
re: M&A's New Currency I still don't have better data on Cisco's stable, but they seem to still be carrying $4B of Goodwill on their balance sheet: under FASB 142 this should be their best valuation of acquired assets (over direct value). Unfortunately, since Cisco was always so fond of the Pooling of Interests method of accounting, it's all but impossible to make any useful interpretation of this fact.

What defines a successful acquisition? I'm more familiar with Nortel's kicks at the can than I am with Cisco's, so I'll discuss them instead.

It has been generally agreed that Nortel's acquisition of the OPTera product has been highly successful by most any measure. But there has been more debate about whether the prior in-house development could have been as good or even better.

In this case, much of what was bought was a new name in the marketplace: none of the acrimony attached to Nortel products carried over to the acquisition, yet the full weight of Nortel's capability to support a product was available. Had they passed on the company, their internal product would have had to compete for the same sort of positive messaging which startups tend to generate. And they would have left a strong competitor standing against them in the marketplace.

And then there's the internal politics, where the proven people from a previous product rarely know what it really needed on a new product: those who know are rarely followed until it's too late. An acquisition is also free of that sort of history.

Nortel had made some other reasonably good acquisitions, such as Shasta and (more controversially) Bay Networks. The former probably could not have been developed in-house; without the latter Nortel would not be where it is today.

For an introduction to FASB 142, see ...
whyiswhy 12/5/2012 | 2:31:09 AM
re: M&A's New Currency Good point about M&A in general, but misses the real attraction.

Incremental R&D expenditures and incremental progress (or the lack thereof) are very hard to keep selling to Wall Street. Not at all sexy. Very risky, takes too long, depends on engineers (egad! geeks!) and/or production (tisk tisk - the poorish-boorish...).

It is much easier to spin and flip an M&A deal, with insiders (the investment bankers and the execs involved) all cooperating to screw JQ Public.

Just like VC's, but add one or two orders of magnitude to the deal size.


rbkoontz 12/5/2012 | 2:31:10 AM
re: M&A's New Currency It is painfully obvious to me, having been intimately involved in several acquisitions, that they fail to meet business objectives over 95% of the time. The biggest factors seem to be cultural incompatibility and failure to execute post-deal with reduced financial incentives.

So why would anyone ever acquire a products or technology vs organic development. The biggest attraction here comes down to accounting. Public companies often cannot sacrifice profitability for prolonged periods to sustain large numbers of organic development projects. The executive decision makers of public companies are under quarter by quarter pressure and risk their jobs to take any different stance. The attraction to use stock-holder dillution to bring a product to market vs. sustained internal investment (and quarterly financial losses) is clear. This factor is highly responsibible for the existence of the venture capital industry.
dljvjbsl 12/5/2012 | 2:31:16 AM
re: M&A's New Currency
Could Cisco have developed a better 10/100 switch internally, in not much more time than was needed to complete these acquisitions?

My experience with internal development is that it is very difficult to get an existing team to do anything genuinely new. My experience is that they always end up failing because they try to relate what they are doing to what they have done before. After all they were very successful previously and see no reason why they should risk that by doing either new things or things in a different way. Job security and status issues all argue against the new project.

I have seen at least three internal development project founder because they were taken over by the existing culture within the company. The one that I saw succeed succeeded because the principals, from the start, saw it as a subversive ad hoc project that needed to protect itself from the existing culture. It was run in competition with a conventional project that had been officially sanctioned. The ad hoc project succeeded because it accepted that there was a need for change and that effective ideas could found in unexpected places. It was not kept secret but actively sought out the support of senior executives.

Remarkably the efforts of the sanctioned project helped the ad hoc project succeed. The comparison between the proposals aided the ad hoc project by showing that the sanctioned project's rehashed ideas were tired and did not fit either the technological and customer context of the day. No minor fiddling of the existing design could fix its limitations. A new way of doing things was required and the ad hoc project showed this possibility.

The books on innovation that I have read seem to echo this. They emphasize how new innovative developments must be protected within an organization. They recommend external development either in a separate location within the same company or within a new company. Even with this, the protection of a powerful executive patron is required. Acquisitions would seem to fall within this second category.

In any event doing something new is a very difficult task to bring about in a large company. Cisco's success in doing this is remarkable.
optoslob 12/5/2012 | 2:31:17 AM
re: M&A's New Currency Cisco's market Cap is $181B enought said, the market has voted!!


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