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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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 donGÇÖt just happen for the obvious reasons GÇô technological or commercial GÇ£time to marketGÇ¥. There are GÇ£strategicGÇ¥ and GÇ£accountingGÇ¥ 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.

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.


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.
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