Optical/IP Networks

Tekelec Is Buying Taqua

Signaling software and gateway company Tekelec Inc. (Nasdaq: TKLC) has agreed to buy Taqua Inc. and will announce the deal on Wednesday morning, Light Reading has learned from two sources close to Taqua. In addition, investment bank Robert W. Baird & Co. Inc. touted the coming deal in a note to clients published Tuesday.

One source says that Tekelec will only pay $120 million for Taqua. Baird's analysts say the price tag is closer to $130 million. Both figures are considerably less than the more-than $140 million that Taqua has raised in funding since its inception six years ago.

Tekelec can afford either number. The company had $339 million in cash and investments as of December 31, 2003.

There does appear to be some overlap in the deal. Tekelec owns 52 percent of Santera Systems Inc., another Texas-based switch maker that makes a larger box aimed at bigger networks. The SanteraOne, Santera's flagship product, is a switch that combines the functions of a Class 4/5 switch, an ATM switch, and a media gateway in one chassis.

Both Taqua and Tekelec (through its stake in Santera) compete for the same carrier business in some cases, but each vendor's approach is unique. Santera comes from the data world and speaks TDM when it has to; Taqua has focused on a next-generation Class 5 switch, though it's updated it with newer data features. Taqua's circuit switch has evolved to include a VOIP gateway. The company's products generally are aimed at replacing central office switches in networks that serve anywhere from 600 to 80,000 subscribers.

Baird analysts say Taqua appears to be making more hay than Santera at the moment. "Taqua has about 85 customers... [and] brings a different softswitch solution, greater market share, large installed customer base and new end markets," writes Baird analysts Kenneth W. Muth, Theodore J. Moreau, and Brad Zoltak.

Its strength has been giving independent operators a way of replacing their legacy voice switches with newer Class 5 switches. But, thanks to a series of linecard upgrades, those carriers using Taqua's gear now have a strategy to get from a TDM to an IP world.

The Tekelec/Santera/Taqua connection appears to have fairly deep roots. Taqua's CEO, Charles Vogt, and its VP of marketing, Jody Bennett, are former Santera executives.

One source familiar with the situation says that Tekelec, flushed form its success in working with Santera, is simply after a larger product portfolio in the voice-over-packet switching market. Specifically, it likes both approaches and wants to capture more of the voice switching market with two distinct approachs, product overlap be damned.

Tekelec also wants a bigger piece of a growing market. There are about 1,300 carriers in the U.S., with an installed base of about 24,000 local phone switches, according to industry analyst Kermit Ross, principal of Millennium Marketing.

The next replacement wave of these switches, which includes the conversion from circuit to packet technology, has already begun and will run its course over the next 15 to 20 years, exhausting some $40 billion in capital, writes Ross in his report, "A Switch to Packet: U.S. Central Office Switch Market Brief."

Infonetics Research Inc. says softswitch revenues for next-generation switches will grow from $380 million in 2003 to $1.9 billion in 2007.

— Phil Harvey, News Editor, Light Reading

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