Taqua Buy Comes Into Focus

Tekelec Inc. (Nasdaq: TKLC) announced Wednesday that it will acquire Taqua Inc. for about $85 million cash, plus all of Taqua’s outstanding options (see Tekelec Announces Taqua Purchase). The deal was first reported by Light Reading on Tuesday (see Tekelec Is Buying Taqua).

The reported price of the acquisition –- in the range of $120 million to $130 million -- comes close to what Tekelec announced. Taqua's outstanding options are worth about $10 million, plus Tekelec has agreed to invest another $30 million in Taqua as part of the deal, according to a well-placed source close to the transaction.

At first, it appeared that Taqua was selling too cheap, considering that it had raised some $140 million since its inception six years ago. But Taqua insiders say that around the end of 2001, when the company was on the verge of closing, it restarted by bringing in new investors to wash out the old ones and by refreshing its board and changing out its executive staff (see Taqua Tacks On $18.5M, Taqua Names Board Members). Since that time, the company has only absorbed a little more than $40 million in funding, which makes the Tekelec acquisition price seem a bit more attractive.

Tekelec says the Taqua purchase will reduce its earnings per share by between 7 cents to 9 cents a share in 2004 and by between 4 cents to 6 cents a share in 2005. Prior to the Taqua purchase, analysts surveyed by Reuters Research predicted that Tekelec would earn about 46 cents a share on revenues of $320.1 million in 2004.

When the deal closes in 60 days, Tekelec will become one of the world's largest suppliers of next generation switching equipment, according to Tekelec president and CEO Fred Lax. The Taqua-Tekelec combo will have about 110 voice switching customers, carrying traffic in Class 4, Class 5, and wireless applications.

"If Tekelec can harness Taqua's traction with the small independent telcos to propel it into the larger IOCs, such as Alltel Corp....then they can go after the large installed base of obsolete circuit switches in these markets, says Kermit Ross, principal at Millennium Marketing. "There's enough revenues and profits there to fuel a deal like this."

On that note, it is interesting that Taqua's board of directors includes Michael Flynn, Alltel's group president of communications, and that Taqua's customer list includes Carr Telephone, a Michigan-based rural LEC that resells some Alltel services. Neither Tekelec nor Taqua have announced Alltel as a next-gen voice switching customer...yet.

— Phil Harvey, News Editor, Light Reading