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Optical/IP Networks

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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