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Optical/IP

Sources: Nortel Could Get Force10

After flirting with the idea of going public for several quarters, Force10 Networks Inc. 's most likely exit may be via an acquisition by Nortel Networks Ltd. , according to several sources. (See Where Are the IPOs? )

One analyst has put the deal as a strong possibility:

"While our confidence level on such a deal is not fully 100%, our information is sufficiently credible and timely that we believe it is worth bringing to the attention of investors," wrote Susquehanna Financial Group analyst Joe Chiasson in a note sent to clients yesterday. "At the very least, we are confident that Force10 is more receptive to a potential non-IPO deal than many may perceive, and if a deal is to occur, it would likely happen very soon."

Chiasson puts the price at around "$450 million to $550 million," with most of that being in cash. At least one other Wall Street source says he's heard that Force10 was "in play" and that Nortel might be the buyer, but he had not heard a price.

Light Reading's latest report on the company stated that it has been out raising money -- recently closing a $50 million funding round -- and has a post-funding valuation of $455 million. (See Force10 Orders One More Round and Force10 IPO Still Hanging.)

Nortel and Force10 couldn't be reached for comment.

The rationale for the deal is that Force10's Ethernet switching technology is newer than Nortel's, and it is solidly entrenched in an area where enterprise switching is headed: 10-Gbit/s switching for data-intensive applications.

"Given Nortel’s renewed emphasis on Enterprise networking and ambition to be a solid second vendor to Cisco in the market, acquiring a leading edge product to address the high end of the Enterprise market makes sense," Chiasson writes. "In addition, the fact that Force10 also sells into carrier and Internet service provider markets fits with Nortel’s presence in those markets as well."

Sources say Force10's revenues were heading north of $100 million this year, but the company's monthly cash burn has historically been pretty high, too. One source says the 200-plus person firm is burning around $4 million a month now.

The financial cost of Sarbanes-Oxley compliance and the departure of the company's CFO have likely not helped Force10's IPO prospects.

Force10's focus and its potential in the enterprise market could be very appealing to Nortel, a company still trying to shake a 10-year hangover of being a financial and a strategic disaster. Recently, Nortel's CEO Mike Zafirovski declared the company's strengths would be in metro Ethernet, CDMA, and 4G wireless networks. Nortel's stock has been trading above $2 for an entire month. (See Zafirovski: We'll Get 4G Right.)

Nortel shares were up $0.03 (1.29%) to $2.36 in early afternoon trading on Friday.

— Phil Harvey, News Editor, Light Reading

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laserbrain2 12/5/2012 | 3:40:46 AM
re: Sources: Nortel Could Get Force10 if they pull this off, NEA will have successfully executed the blackjack strategy to keep doubling your bet each hand you lose. Eventually you win a hand and make it all back.

This is of course a loser's bet unless you have unlimited money.

Which, apparently, NEA does.
sjtech 12/5/2012 | 3:40:45 AM
re: Sources: Nortel Could Get Force10
hmm I wonder? Force10 has been on the verge of IPO(well more than once), I just think they would do better going IPO unless there is $cling $cling for the management in this deal.
Light-bulb 12/5/2012 | 3:40:39 AM
re: Sources: Nortel Could Get Force10 Fantastic, absolutely fantastic!

This would be huge for Force10... with the incredible sales force and direction of Nortel, not to mention their exposure and influence over the data-center and high performance computing centers this is a match made for absolute bliss.

The only other potential suitor that would make even more sense here would be Tellabs... Hmm, maybe Fujitus? Wait I know... jeez of course Ericcson!

Good grief, do these people actually research anything, or do they just pull something out any given orifice depending on the alignment of the stars?

Cheers,
valleyguy 12/5/2012 | 3:40:35 AM
re: Sources: Nortel Could Get Force10 If Nortel is finally getting its act together, this would make a lot of sense for them. If they buy Force10, Juniper is the big loser. Juniper will have a so-so security portfolio which could never compete against Cisco's thirty odd security offerings, and a suddenly aging router in the core, some really spotty stuff out of Unisphere and that's it. They would no longer be a leader in any technology category in their space. They made a name for themselves with cutting edge technology and Kriens has let them fall into mediocrity in almost every area of the company. Too many failed acquisitions to count. Now they have a golden opportunity to right themselves for the next 10 year run, and they will undoubtedly squander it (this assumes they still have the financial clout to compete for Force10). It's half time and they aren't making adjustments while the other team is building on its lead.

The one to watch is the company with a strong direct sales force. You need that and strong technology to compete against Cisco. They own the channel because they own large enterprise. Simple as that. Break their choke hold on large enterprise and things will fall into place because we all know their technology is getting long in the tooth (Crescendo and the 6K family now 9 years from GA!). People want change, and they want new options but will the right combination of companies emerge to take advantage?
muxbux 12/5/2012 | 3:40:34 AM
re: Sources: Nortel Could Get Force10 Well Marc Randall certainly wanted his own IPO however I think smarter heads may prevail. (No Disrespect meant Mr. Randall your a talented guy for sure) If they go IPO they still have no clout to compete. Nortel Acquiring this technology (and Tasman) gives them a new and seriously competetive tool for their arsenal. People will start to see Nortel winning DATA deals which have been nearly extinct at Nortel. Nortel's new management has it right on.

Add the Microsft alliance a new raoter switch protfolio that can kick Cisco's butt for price/performance and the 800 LB gorilla is going to start feeling the pain.
Stbl 12/5/2012 | 3:40:34 AM
re: Sources: Nortel Could Get Force10 F10 is successful but still principally in the niche datacenter switching market - to state that JNPR will be the big loser if they don't buy F10 is naive. For this to be key for JNPR it would have to open a large market like enterprise switching or carrier ethernet (both markets that JNPR is missing currently). F10 doesn't open either and further it is not obvious that anyone has found an answer to Cisco in enterprise switching.

Certainly F10 would have no hope of solving JNPR's technology leadership issues "for the next 10 years." This could only be written by an F10 shareholder or employee... ;-)
BBBoa 12/5/2012 | 3:40:33 AM
re: Sources: Nortel Could Get Force10 In response to 'valleyguy' - will someone help me understand how this is the JNPR death knell? Perhaps it is, I just don't see it.

It seems to me, a combined NT+Force10 PLUS a tightly coupled JNPR partnership would lead to a viable alternative to CSCO. Certainly, there's some security products overlap - but I don't see JNPR playing in the Layer 2 space today and I don't see NT or Force 10 doing anything in the core router space.

Can someone enlighten me?

Thanks.
brahmos 12/5/2012 | 3:40:31 AM
re: Sources: Nortel Could Get Force10 >I don't see JNPR playing in the Layer 2 space today

well many analysts say they are working on various toys for that sandbox . if they can come up with a good ethernet switch family, the smaller players like fdry, extreme can probably be driven out of business and catalyst will lose some of its massive mktshare...its unnatural for a single product line to command a 90% share of a giant market.
BBBoa 12/5/2012 | 3:40:28 AM
re: Sources: Nortel Could Get Force10 In response to 'tmc1' where it was stated "You think that Juniper is strong enough in enterprise sales and relationships to just come up with a product, take market from cisco AND drive other companies that have been competing in that space for years out of business???"

I agree with your point - which is what prompted me to state that a partnership between Juniper and the combined forces of NT and Force 10 provide a compelling alternative to Cisco. Without the combined forces, JNPR nor NT/F10 have the technology or the market access and distribution to challenge Cisco by themselves.

If you agree with the above, then a reasonable assertion is that the NT/F10 deal is NOT the death knell to Juniper - agree or disagree?


tmc1 12/5/2012 | 3:40:28 AM
re: Sources: Nortel Could Get Force10 >I don't see JNPR playing in the Layer 2 space today

well many analysts say they are working on various toys for that sandbox . if they can come up with a good ethernet switch family, the smaller players like fdry, extreme can probably be driven out of business and catalyst will lose some of its massive mktshare...its unnatural for a single product line to command a 90% share of a giant market.
---------------------------------------------

You think that Juniper is strong enough in enterprise sales and relationships to just come up with a product, take market from cisco AND drive other companies that have been competing in that space for years out of business???

You TRULY are an optimist! It IS unnatural for a company to have 90% of a market but it will not be Juniper that breaks this stranglehold.
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