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Optical/IP

Tekelec Tests Softswitch Waters

Tekelec Inc. (Nasdaq: TKLC) this week announced a merger agreement with softswitch maker Santera Systems Inc., in a move that highlights the progress of Tekelec's identity change -- and points to the ongoing struggles in the market it left behind (see Santera, Tekelec Fuse Switching Units).

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

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jgh 12/5/2012 | 12:07:28 AM
re: Tekelec Tests Softswitch Waters The test equipment marketplace may be slowing down, but buying Santera is throwing money down the toilet
Santera has no traction in the softswitch market, which is small to begin with. Let's see Taqua is beating them in the "huge" rural telco marketplace. Where is Santera's value, not $28M.
I guess Tekelec will buy a DSL equipment maker next.
xyzzy12 12/5/2012 | 12:07:27 AM
re: Tekelec Tests Softswitch Waters "What a crappy deal for Santera employees. Tekelec gets 52% for $28M, so the post deal value is $54M with $40M in cash - that means the predeal value was Santera at $14M. OUCCHH! and 74% dilution - DOUBLE OUCCHHHH. You can pretty much write those shares off - even if they are vested. I hope the employees didn't write to many checks buying those options.

Looks to me like this was a desperate company trying to get money any way they could and if that meant merging with the Tekelec division, they had no choice. It was also a chance for Tekelec to shed a loser division and get some VC's to take 72% of the losses."
joe_average 12/5/2012 | 12:07:26 AM
re: Tekelec Tests Softswitch Waters xyzzy12 rolled the time machine back to 1999 and stated:

"What a crappy deal for Santera employees. Tekelec gets 52% for $28M, so the post deal value is $54M with $40M in cash - that means the predeal value was Santera at $14M. OUCCHH! and 74% dilution - DOUBLE OUCCHHHH. You can pretty much write those shares off - even if they are vested. I hope the employees didn't write to many checks buying those options.
Looks to me like this was a desperate company trying to get money any way they could and if that meant merging with the Tekelec division, they had no choice. It was also a chance for Tekelec to shed a loser division and get some VC's to take 72% of the losses."

====================

Whoa cartesian coordinates guy! Just having a job these days is reason enough to celebrate. The days of making even a couple of thousand of your stock options is in deep (ice age) hibernation.

I'll trade you my thousands and thousands and thousands of start-up options for your job. ;-)
xyzzy12 12/5/2012 | 12:07:23 AM
re: Tekelec Tests Softswitch Waters It will be a great country again when employees are treated as fairly as the VCs and the executive staff.

With your kind of thinking ... we could just be communists and be glad that we had a loaf of bread and some water for dinner ( our only food of the day ).
SW-LOS 12/5/2012 | 12:07:17 AM
re: Tekelec Tests Softswitch Waters Gotta agree with Joe on this one.

I've gotten the line from mgmt about "you don't want us to get bought" while they're cutting back and laying off more people to keep the burn rate down.

Chatted with former colleague the other day, he's been out of work for over a year. I saw him at his new job -- Home Depot -- he needed something to keep the mortgage paid.

I'd rather have management admit there's no way they're gonna make it big, and have them hook up with someone who isn't counting the months until there's no more money, instead of spouting off about how great things will be if we just work a few more hours and get those features that sales needs for the next big score.

That way the job choice will be mine.
optical_man 12/5/2012 | 12:07:16 AM
re: Tekelec Tests Softswitch Waters "Author: xyzzy12 Number: 4
Subject: Re: Santera employees got screwed!
With your kind of thinking ... we could just be communists and be glad that we had a loaf of bread and some water for dinner ( our only food of the day ). "

I beg to differ my friend. It is YOUR viewpoint that says "some people (the VC's and mgmt) make off with all the money, and the Workers should be EQUALS". Tell me xyzx, does that sound like a capitalist or a communist?
Communist.
Now, does Mgmt need some overhauls to stop the pillaging of the corporate coffers? Yes. We enact laws, FASB rules for that. We don't get draconian and say "make all pay equal, that'll solve the problem!". No. That's liberalism...socialism....communism...in that order...(little bit is what we see, liberalism....current Democratic Party in U.S. is leaning more towards socialism, but that's a whole other discussion)
Call your congressman and tell him your concerns.
o_m
singlefellow 12/5/2012 | 12:07:16 AM
re: Tekelec Tests Softswitch Waters Maybe they will buy Taqua too after Vogt blows that measily 20 Million on golf bags and superbowl tickets!
sgan201 12/5/2012 | 12:07:15 AM
re: Tekelec Tests Softswitch Waters Hi optical_man,
It is very simple...
Taqua has a sellable product and Santera don't..
If you know why, then, your understanding of media gateway market is superior than 99.999% of the people our there..

If you see this two years ago, then you are one of the few people in the market. Somehow, Taqua has people that know exactly how kind of product that needs to be built to be sellable..

optical_man 12/5/2012 | 12:07:15 AM
re: Tekelec Tests Softswitch Waters "Maybe they will buy Taqua too after Vogt blows that measily 20 Million on golf bags and superbowl tickets!"

Vogt left Santera for Taqua. Any idea why? Telecom Corridor is curious.
billy_fold 12/5/2012 | 12:07:13 AM
re: Tekelec Tests Softswitch Waters "Vogt left Santera for Taqua. Any idea why? Telecom Corridor is curious."

That's an easy one. He is just trying to stay one step ahead of the grim reaper (Accelerated, Santera, now Taqua) leaving destruction in his wake. Hey, maybe he is the grim reaper.

-billy
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