Nortel/Avici: Getting Together?

Talk on the street today has Nortel Networks Corp. (NYSE/Toronto: NT) linking up with Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) in some sort of tight partnership, possibly even an outright acquisition, says a reliable source.

Other sources confirmed that the two have explored partnerhips in the past, but nobody could confirm the details of the current deal on the table. The two do have a history together. Prior to Avici's IPO in 2000, Nortel was an early investor in the startup, and they had a non-exclusive relationship at one point, before Nortel moved on to working with Juniper (see Avici IPO Heats Up and Juniper-Nortel "Alliance" Gives Pause).

The action in Avici’s stock may be enough to indicate something may be up. Avici was up $0.33 (4%) to $8.48 on heavier-than-usual volume in Tuesday afternoon trading.

”This deal was talked about months ago, but it may now be happening,” says the source, who is a telecom equipment executive. “Nortel is an investor, and they don’t like the partnership with Juniper because Juniper partners with everybody."

The deal does make sense, and here's why: In the past, Nortel has depended heavily on its reseller agreement with Juniper Networks Inc. (Nasdaq: JNPR) to supply its largest customers with IP routing gear. But that partnership never blossomed into anything bigger, such as product co-development or acquisition. Meanwhile, Juniper's been racking up deals with all of Nortel's competitors. In fact, its roster of partners now includes Siemens AG (NYSE: SI; Frankfurt: SIE), LM Ericsson (Nasdaq: ERICY), and, most recently, Nortel's North American archrival Lucent Technologies Inc. (NYSE: LU). Because Juniper has so many channel partners, some sources say that Nortel is now disenchanted with the Juniper relationship.

Juniper says everything's peachy with Nortel, and the partnership is working. "We have a partnership with Nortel that's ongoing, and we're not aware of any issues," says a Juniper spokeswoman.

But if Nortel is unhappy, it may act quickly. These days, with telecom equipment moving more rapidly toward packet-based networks, it’s become more important than ever for Nortel to have a good IP routing story. The most natural fit is Avici, the third-largest supplier of IP routing gear behind leaders Cisco Systems Inc. (Nasdaq: CSCO) and Juniper.

One fund manager, asking not to be named, said a deal with Avici makes sense, though he’s heard nothing specific. “Yes, it makes sense if they think there is leverage in the platform. And the valuation is still reasonable.”

At Tuesday’s market price, Avici had a market cap of about $100 million. Gross revenue for the quarter ended September 30, 2003, was $10.5 million (see Avici Boosts Top Line). Avici ended the quarter with plenty of cash -- about $60 million -- and no debt. But it is still losing money: Its GAAP net loss was $9.1 million, or $0.75 per share, which included several charges. Excluding these charges and credits, the net loss was $8.7 million, or $0.72 per share.

With $60 million in cash and short-term investments ($100M if you include long-term investments) and recent quarterly growth, Avici's market multiple is cheap relative to its peers. Assuming it can keep up modest quarterly growth and do $50 million in business in 2004, that gives it a forward multiple of only two times sales, which is below the industry norm. Juniper, for example, trades at about 12 times sales.

Nortel said it does not comment on market rumors, and Avici could not be reached by press time.

— R. Scott Raynovich, US Editor, Light Reading

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waverunner 12/5/2012 | 2:45:23 AM
re: Nortel/Avici: Getting Together? Hyperchip is in their backyard, what is this pre-Avivi start-up doing to partner? Get some real sales guys there, Buddha Richard.
Peter_anonymous 12/5/2012 | 2:45:23 AM
re: Nortel/Avici: Getting Together? I always ask myself what is going to happen to Hyperchip, Chiaro and Caspian?
It looks Buddha Richard and Buddha Lawrence could not sell any routers.
coreghost 12/5/2012 | 2:45:22 AM
re: Nortel/Avici: Getting Together?
This deal is a marriage between an alcohlic
groom and a dead bride.

I would ask what nortel is thinking, but I dont
think there is any thought at the top levels at
all anymore. I mean with Procket they would
have at least got a new product rather than
something that has been shopped around every
ISP in the business multiple times with no
opticalwatcher 12/5/2012 | 2:45:21 AM
re: Nortel/Avici: Getting Together? "deal is a marriage between an alcohlic
groom and a dead bride"

This seems unnecessarily harsh considering that:
1. Avici has the scaling solution that HFR is supposed to solve for Cisco and Gibson is for Juniper. (What was Procket's scaling solution again? Oh that's right--they don't have one).
2. Avici has sold core routers to RBOCs in the US and Europe. Who has Procket sold to again?
3. Avici has a chance at making a profit. Procket could go under if they don't make any large sales.

Don't get me wrong, I think Procket has a great product. But it's not THERE yet. Avici's IS.

signmeup 12/5/2012 | 2:45:20 AM
re: Nortel/Avici: Getting Together? Actually, I expect to see Avici's revenues decline this year - AT&T's buying cycle is running down and Avici hasn't found any new opportunities. I know of at least 4 major providers that have looked at Avici over the past 2 years and determined that they offered no compelling reason to buy their product.

Procket really doesn't need a scaling solution to beat Avici - it would take 3 full racks of Avici gear to equal 1/2 rack of density in Procket's 8812 configuration.

What Avici DOES have is more cash in the bank than Procket. We will just have to see who executes better in 2004.
change_is_good 12/5/2012 | 2:45:20 AM
re: Nortel/Avici: Getting Together? who has nortel acquired that has amounted to anything? really...

they couldn't sell avici five years ago and they certianly can't sell it now.

sure, it might sit in the back of a lab for nine months, but there won't be many cycles wasted on it.

run_lola_run 12/5/2012 | 2:45:20 AM
re: Nortel/Avici: Getting Together? Gee! What's next. Will NT will dig up the Versalar 25000 and OPS.
InsertionLoss 12/5/2012 | 2:45:18 AM
re: Nortel/Avici: Getting Together? :)
cpad2000 12/5/2012 | 2:45:18 AM
re: Nortel/Avici: Getting Together? Don't usually comment and have no opinion to shares of AVCI but in future you should work through entire balance sheet as AVCI cash position is more accurately reflected by following:

cash and cash equivalents - 21,581
marketable securities - 38,207
Long term marketable securities - 44,078
total - 103,866.

Equates to $8.32 a share in cash.

first two categories are highly liquid securities with original maturation of 3 months or less at date of acquisition and are considered cash equivalents. Longer term is commercial paper, corporate bonds and US gov't obligations. From market perspective they are generally considered cash as well.

Just for future reference

InsertionLoss 12/5/2012 | 2:45:18 AM
re: Nortel/Avici: Getting Together? I believe they have $8 in cash if you include the Long Term Marketable Securities.
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