Tekelec Tests Softswitch Waters
First, the news: Tekelec is paying $28 million in cash and spinning off its packet telephony business to join with $12 million from Santera's investors and the assets of the softswitch firm. The resulting entity will be a new division of Tekelec, to be called Santera, a Tekelec Company. Tekelec will own 52 percent of the division at first and will have an option to buy it outright starting in July 2005.
The new Santera will be headed by the current management team. Santera's 200 employees will join the new division, and Tekelec plans to port over another 75 people. Headquarters will remain at Santera's present digs in Plano, Texas.
Tekelec won't be giving up its minority stakes in BroadSoft Inc. and Telica Inc. after the deal closes in or around the current quarter, execs said, even though these companies make packet-voice and softswitching gear that may compete with Santera's. (BroadSoft, by the way, ranks among top telecom software startups in Boardwatch's Top Ten Private Companies).
The move comes nearly a year after Tekelec sold its diagnostic and test equipment to Catapult Communications Corp. (Nasdaq: CATT) for $59.8 million. For years, Tekelec had been a key player in datacom and telecom testing gear, including protocol analyzers. But the business had fallen on hard times and was a "drag" on earnings, according to spokesman Michael Attar.
Tekelec's not alone in parting with its old test-gear roots. Nettest separated from its parent in January (see Nettest Leaves the Mother Ship), emerging in a management buyout, the future of which remains a question mark.
Since selling the diagnostic gear, Tekelec seems to have built up a more promising product lineup, one based on telecom signaling hardware and software, contact-center products, and now packet-voice solutions. While it suffers along with others in the current market (revenues were $55 million last quarter, down 6 percent sequentially and 9 percent year over year), Wall Street seems to like its cautious and focused strategy.
"We view this [merger with Santera] as a long-term strategic move for TKLC during a difficult time for the many remaining private packet voice companies," write Rich Church and Bill Gildea of Wachovia Securities Inc. in a note this week. They say terms of the arrangement mean Tekelec minimizes its exposure to losses incurred by Santera.
"In the past year, Tekelec has taken several corporate restructuring moves aimed at increasing long-term shareholder value," writes analyst Steven Levy of Lehman Brothers in a note yesterday. Levy says Tekelec's valuation should go up as a result of the deal, and he lauds Tekelec for taking its time deciding whether to put more than a couple of toes in the packet-voice waters. Levy sees signs of "momentum" in that market, even though it's had its ups and downs (see Taqua Cuts in on Santera at 1stel and Softswitch Vendor Dodges Bullet ). (Disclosure: Lehman advised Tekelec on this merger.)
Meanwhile, there are clear signs the test equipment market Tekelec left behind continues to morph. This month, difficulties came to light at Acterna Corp. (OTCBB: ACTR) in the latest of a series of troubling signs in the test market (see Acterna Default Points to Testing Times).
Catapult, which took over Tekelec's test wares, is in the midst of the struggle. For its last quarter, ended December 31, 2002, net income fell to $111,000 or $0.01 per diluted share, compared with net income of $3.4 million or $0.25 per diluted share, at the same time last year.
— Mary Jander, Senior Editor, Light Reading