Optical/IP Networks

Redback, Alcatel Close to Alliance

Redback Networks, Inc. (Nasdaq: RBAK) is working to iron out a distribution and technology sharing agreement with Alcatel SA (NYSE: ALA; Paris: CGEP:PA) by the end of the month, Light Reading has learned. The alliance would give Redback a boost in its efforts to sell to large carriers and would likely allow the company to execute some more layoffs and other cost-cutting measures in the next few weeks.

A source close to Alcatel says that senior Alcatel executives were in California early this week to talk with Redback brass about a possible deal. The specifics of the alliance are not yet known, but the broad objective of the agreement, according to the source, is this: Redback will add subscriber management and routing functions to Alcatel's 7300 DSLAM products, in exchange for Alcatel agreeing to resell Redback's gear worldwide.

Interestingly, Alcatel has often been talked about as an interesting merger partner for Redback. And since Redback has pared back development for its optical transport products, the two companies don't compete as directly as they once did.

In a note to clients early this month, Morgan Stanley Dean Witter & Co. analyst David Jackson strongly hinted that a deal was in the works. "We think Redback may assist Alcatel in adding IP intelligence to Alcatel's market-leading DSLAMs. We believe that [Alcatel's] current DSLAMs lack such functionality and remain high-density, low-cost, low-intelligence multiplexers."

If an agreement is reached, it could be seen as an admission of technology weakness on Alcatel's part. "Such a deal would definitely be an indictment of Alcatel's existing broadband aggregation technology," says Ron Westfall, an analyst at Current Analysis.

Westfall says that an agreement between Redback and Alcatel wouldn't be surprising. "It is probably something driven by the RBOCs, who would be interested in having two big suppliers of their DSL and broadband aggregation equipment work more closely together."

An alliance with Alcatel would mark the second time in several weeks that Redback has cozied up to a larger equipment provider to help it win deals with larger carriers. Nokia Corp. (NYSE: NOK) recently made a $36 million investment in Redback, giving Nokia a 10 percent stake in the company, a seat on the board, and an option to buy up to 20 percent of the company at a later date (see Nokia Invests $36M in Redback).

Nokia and Alcatel, however, are competitors in several technology areas, including broadband access and GSM and UMTS mobile infrastructure gear. However, an Alcatel-Redback alliance would give Nokia the ability to indirectly penetrate the access networks of large U.S. carriers.

For Redback, a deal with Alcatel couldn't come at a better time. The deal would allow Redback to do two things it needs to do: cut costs and gain a little more leverage with carriers. The deal would be even sweeter if Redback could get Alcatel to give it specific revenue commitments for specific product lines.

Steady sales from distribution partners, along with its dependable subscriber management system (SMS) equipment business, might help Redback avoid having to scratch and claw to make its numbers at the end of the quarter (see Will Redback Close the Gap?).

Alcatel, Nokia, and Redback all declined to comment for this article.

— Phil Harvey, Senior Editor, Light Reading

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