Sources: Tekelec to Sell Switching Business
Sources said -- and Light Reading published -- earlier today that North Carolina-based Tekelec was going to announce the sale of its switching division during its third-quarter earnings call on Wednesday. The company instead only confirmed that it wanted out -- telling investors it had retained JPMorgan Partners to help it find "strategic opportunities" for the switching business. While Tekelec didn't announce a sale Wednesday, it did impair the switching unit by $100 million in its quarterly numbers, effectively writing it off. (See Tekelec Reports Q3.)
A Tekelec spokeswoman said earlier Wednesday that her company could not comment on the matter. (See Job Cuts Prolong Tekelec's Tech Wreck.)
Tekelec has over the past few years attempted a move into the IP switching business, putting less emphasis on its core signaling business. The gambit never quite panned out.
The company got into the switching business with the acquisitions of Taqua, Santera, and VocalData in in 2003 and 2004. (See Tekelec Is Buying Taqua, Santera, Tekelec Fuse Switching Units, and Tekelec Connects With VocalData.)
Analysts pegged Tekelec's move into switching a failure, saying Tekelec's investments in the business far outweigh the returns. The profit margins of the business aren't nearly as good as those in Tekelec's signaling business, analysts note.(See Tekelec Puts Switching on Notice.)
Ericsson has wanted to expand its reach in the business to the North American market. The vendor was one of the bidders for Riverstone Networks Inc. (OTC: RSTN.PK) earlier this year, but lost out to a higher bid from Lucent Technologies Inc. (NYSE: LU). (See Lucent to Spend $207M for Riverstone and Ericsson's Riverstone Hangover.)
An Ericsson spokesman did not return calls for comment by deadline.
Analysts are likely to applaud Tekelec's move. "This is addition by subtraction," says Piper Jaffray & Co. analyst Troy Jensen. "By getting rid of a not-so-profitable business they can make some upward revisions to higher revenue expectations."
Jensen says the selling price for the switching unit is probably only in the $50 million to $80 million range. "Who's going to pay a lot for the business when media gateways will ultimately go away someday?" he asks.
Much of Tekelec's switching sales had come through a reseller agreement with Alcatel (NYSE: ALA; Paris: CGEP:PA). Of the $30.7 million in switching revenue Tekelec reported for the second quarter, $19.4 million came from sales through the French supplier. Alcatel’s planned merger with Lucent has given rise to some concerns about the future of Tekelec’s Alcatel connection.
Alcatel has also developed its own wireless switch to replace the Santera switches it has been sourcing from Tekelec. Sources say Alcatel signed a three-year agreement to continue buying the Santera switches; the fate of that contract after the sale is unclear. (See Alcatel Gateway Troubles Tekelec.)
— Mark Sullivan, Reporter, Light Reading