Marconi and Laurel in Talks
The latest could be a deal between IP edge routing startup Laurel Networks Inc. and Marconi plc (Nasdaq/London: MONI). Laurel would not comment on the subject, but Marconi confirmed the two are in talks.
“I can acknowledge we are in discussions with Laurel on some mutual market opportunities,” says Richard Kushner, vice president of industry relations for Marconi. “But that’s about all I can say at this point.” Industry observers say that partnerships are crucial in these tough economic times. And they view a Marconi/Laurel pairing as a good fit.
“It makes a lot of sense,” says Stephen Kamman, an equities analyst with CIBC World Markets.
He says the relationship would be a win/win situation for either company. Startups aren’t able to break into incumbent accounts without a "big brother." And he adds that incumbent equipment vendors, like Marconi, need an IP story to be considered for new network build-outs.
“You’ve got Verizon and AT&T saying that their future networks will be based on IP,” says Kamman. “And to date there have been no traditional telecom vendors that have been able to develop a good IP offering in-house. My feeling is that the carriers are the ones pushing this from both sides.”
A Marconi/Laurel alliance certainly fits into a larger overall trend, but the two companies also complement each other on a technical level. Specifically, Marconi, which generates over 70 percent of its business from optical products, is missing a packet edge solution, which the Laurel IP edge router could fill. Laurel also will be announcing new enhancements to its product next week. (Look for a story on Laurel's new product announcement later today on Light Reading.)
The potential deal also makes sense from a sales perspective. Marconi has an "enviable customer list in Europe," according to Kevin Mitchell, an analyst with Infonetics Research Inc. Laurel also has gotten some traction in Europe. But, just as in the United States, Laurel needs partnerships to close deals with the European PTTs. Siemens AG (NYSE: SI; Frankfurt: SIE) and LM Ericsson (Nasdaq: ERICY) have been strong channel partners for Juniper, especially in the last few quarters (see Juniper Boosts Spirits).
While Marconi is strong in Europe, it’s relatively weak in North America. For the most part, it only sells to old customers of FORE Systems, an ATM switch company it acquired in 1999. Although Sprint Corp. (NYSE: FON) and WorldCom Inc. once bought FORE's ATM switches, most of Marconi's remaining customers in this field happen to be competitive local exchange carriers (CLECs), which have struggled over the past couple of years.
Even though Marconi has little traction among incumbent carriers like the regional Bell operating companies (RBOCs) in the U.S., its large service and support organization might help Laurel close some business with these carriers. Laurel supposedly lost a deal with Verizon Communications Inc. (NYSE: VZ), because the carrier wanted to ensure that production could be ramped up and equipment could be installed and maintained on a national scale, say sources (see Juniper Still Working Verizon Deal and How Will Verizon Go National?).
Currently, Marconi generates a little over a third of its revenue in its Core Networking Division from maintenance and services, says Infonetics. The company acquired an extensive field engineering force in North America as a result of the Reltec Corp. acquisition in 1999. Most of the technicians install and maintain outside plant and power equipment, but they can do board swaps, and they are in-territory. As a matter of fact, Marconi installs and maintains all the Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) routers in the AT&T Corp. (NYSE: T backbone.
Laurel executives also have ties to Marconi. Laurel's three founders, Atul Bansal, president and CEO, Steve Vogelsang, vice president of marketing, and Robert Warden, vice president of engineering, all worked for FORE Systems before the Marconi acquisition.
Bansal had been president of FORE Systems' Network Control Technology, an IP routing division, as well as director of FORE's multilayer Ethernet switching division. Vogelsang was senior director of strategic marketing at FORE Systems and developed and executed a marketing strategy to expand FORE's presence in the service provider market. Warden led the hardware engineering teams at FORE Systems, where he spearheaded the design, implementation, and market introduction of new ATM and IP switching systems installed in some of Marconi’s largest service provider customer networks.
These execs all left Marconi right after the $4.5 billion merger closed. Some might view their departure four years ago as a reason why this deal might not work. But sources say the ex-FORE team still keeps in touch with their old buddies at Marconi. Indeed, Vogelsang has been spotted meeting his former FORE colleagues at a Mexican restaurant on Route 9 in Warrendale, just outside of Pittsburgh, where both companies are headquartered.
“It’s funny. Three years ago, Marconi would have just bought them outright,” says Sam Wilson, an analyst with JMP Securities.
Times have certainly changed. In 1999, Marconi paid cash for FORE Systems. Today, Marconi is broke. The company is currently restructuring its debt (see Marconi Details Restructuring). With this in mind, Marconi acquiring Laurel seems out of the question. Debt holders, which essentially own the company, would never approve a cash sale now, especially given Marconi’s dodgy acquisition history. And it’s highly unlikely that Laurel executives would want equity in Marconi.
“Marconi can’t take another money-losing acquisition,” notes Wilson. “This way they can have their cake and eat it, too.”
Analysts say a deal with Laurel would not interfere with Marconi's partnerships with Riverstone Networks Inc., because that deal focuses exclusively on reselling Riverstone gear for Ethernet deployments (Nasdaq: RSTN) (see Riverstone Hitches a Ride With Marconi).
Observers might wonder whether the deal with Laurel will make Marconi "third time lucky" in its quest for an OEM deal with an edge router vendor. Sources say Marconi was on the brink of signing a deal with Springtide when the startup was acquired by Lucent for $1.7 billion (an acquisition that went nowhere -- see Lucent Silences SpringTide). Marconi also had an OEM deal with Unisphere, until it was acquired by Juniper (see Juniper Scoping Out Unisphere? and Juniper to Buy Unisphere).
— Marguerite Reardon, Senior Editor, Light Reading