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Optical/IP

Terabeam Merges for Peanuts

Terabeam Corp., a provider of Free Space Optics (FSO) networking equipment and services that burned through nearly $500 million over the past few years, announced yesterday that it’s merging with YDI Wireless Inc., a small wireless systems provider based in Falls Church, Va.

It’s a striking end to the topsy-turvy story of a high-profile investment, first championed by Lucent Technologies Inc. (NYSE: LU). It's also a symbol of the overhyped nature of the FSO market, which has gone through many phases of hope and disappointment (see The New Reality of FSO and New Life for FSO?).

Terabeam was plagued by controversy almost from the beginning. The technology, described orginally by Terabeam as carrying data traffic through the air at "gigabit" speeds, was subject to hyperbole (see The Truth About TeraBeam .

The company was even endorsed by the notorious Jack Grubman, while he was still the managing director and telecom analyst for Salomon Smith Barney. In an April 11, 2000, press release issued by Terabeam, Grubman said: "This is the first example of revolutionary technology I've seen in 23 years... My hunch is that TeraBeam is the next meteoric rise in the emerging telecom space."

According to the startup's marketing materials, telecom pundit George Gilder also oozed with praise at the mention of Terabeam's name. “Terabeam commands at once the most disruptive and redemptive technology in all communications," Gilder said, according to Terabeam. "I have been looking for such a company for a decade.”

Terabeam's merger with YDI, which sports a market capitalization of under $100 million and trades as a bulletin board stock, won’t likely be seen by investors -- who pumped hundreds of millions of dollars in the company and were left with less than $80 million in assets at the end -- as a happy ending.

Terabeam raised at least $526 million, $450 million of which was supplied by Lucent. Lucent and Terabeam agreed to terminate most of the existing arrangements between them in 2001, and Lucent wrote off $328 million, which accounted for most of its investment at that time, including goodwill and other intangibles.

As Terabeam’s losses mounted, things got tense in 2002, when a group of Terabeam’s shareholders, including the founder and some of the venture capitalists that had funded the company, tried to stop the company’s money-losing ways, attempting to get the company to disburse its cash (see A Fight for Cash at Terabeam). The effort failed.

The deal with YDI is complex, and its value depends on a number of variables, but in the most optimistic scenario Terabeam shareholders could end up with 47 percent of the outstanding shares of the combined company. With YDI valued today at about $90 million, the deal's probably valued around $50 million or less.

The terms of the deal call for Terabeam to exchange each of its shares for 0.22 shares of YDI's common stock, but that ratio drops to 0.20 shares of YDI's common stock if YDI's average stock price before closing is higher than $5.40. With YDI recently trading around $6.25, the 0.20 ratio looks more likely to be the case.

”We did not put any value on the transaction, because there are too many variables,” says David Renauld, vice president of corporate affairs for YDI. Renauld says the 47 percent ownership after the deal assumes that all of Terabeam’s warrants and options would be exercised. He considers it likely YDI would issue more stock. YDI’s share count currently stands around 14.3 million, and that could increase by as much as 12 million when the company issues new stock, says Renauld.

The deal looks like a good one for YDI, a company with only 100 employees that could end up with a substantial amount of Terabeam’s remaining cash, in exchange for stock.

At the time the merger was announced yesterday, Terabeam had cash and cash equivalents of $60.3 million, total assets of $74.3 million, total liabilities of $14.2 million, and stockholders' equity of $60.1 million, according to a corporate press release. Some of Terabeam's cash on hand will be used to pay restructuring and merger expenses, currently anticipated to be in excess of $6 million and which “may be significantly higher,” according to a corporate press release.

In a March 25th filing with the SEC, YDI stated that it had $9 million in cash. It had annual sales of $27.3 million in 2003, up from $20.3 million in 2002. Its two biggest customers were Enterasys Networks Inc. (NYSE: ETS) and Verizon Communications Inc. (NYSE: VZ), which accounted, respectively, for 9.2 percent and 8.1 percent of its revenues.

YDI shares have risen more than 20 percent since the deal was announced on Wednesday, perhaps reflecting that it could end up with a substantial amount of Terabeam’s cash after the deal.

So what’s to become of Terabeam’s technology, a gigabit-speed optical system that was designed to transmit data without the use of cable? That’s not yet clear, according to Mr. Renauld. It’s also not yet determined how many of Terabeam's employees would be kept. “There’s no definite answer to these questions,” says Renauld. “We’ll have to wait to put the companies together.

YDI makes point-to-point and point-to-multipoint microwave radio systems as well as what it calls “high capacity point-to-point millimeter wave (MMW)” systems. But with fairly small revenues and capital, it’s not exactly a monster.

YDI is majority held by two controlling parties, Concorde Equity, LLC and Michael F. Young, which between them own over 60 percent of the outstanding common stock. Concorde Equity is an investment company controlled by Robert E. Fitzgerald, a board member and CEO of YDI. Mr. Young is a board member, president, and chief technical officer.

YDI says it will add Dan Hesse, the Terabeam CEO, to its board of directors. Terabeam investors Mobius Venture Capital and Softbank were expected to retain a stake in the new company.

Terabeam officials did not respond to requests for comment.

— R. Scott Raynovich, US Editor, Light Reading

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technonerd 12/5/2012 | 2:02:07 AM
re: Terabeam Merges for Peanuts Looks like net of cash, TeraBeam was literally given away. Hey, kids, this was another favorite of David Isenberg of "Stupid Network" fame. And who can forget the press release from TeraBeam and Merrill Lynch (a late-round venture investor) shortly after 9/11, in which TeraBeam was credited with restoring Merrill's internet connections?

This must have been interesting, given that it doesn't appear that TeraBeam's "FSO" technology will send a beam as far as the Hudson River is wide. But hey, what are national tragedies for other than to cash in? If the CEO of Verizon could use 9/11 as justification to call CLEC technicians potential terrorists, what's a little future-IPO hype among friends?
technonerd 12/5/2012 | 2:02:06 AM
re: Terabeam Merges for Peanuts How do you fit Nortel and Lucent into your California-stupid-corrupt-shyster-IPO-VC model?
All Northern California technology companies might be shysters, but not all shysters are Northern California technology companies.
dljvjbsl 12/5/2012 | 2:02:06 AM
re: Terabeam Merges for Peanuts How do you fit Nortel and Lucent into your California-stupid-corrupt-shyster-IPO-VC model?
sevenbrooks 12/5/2012 | 2:01:53 AM
re: Terabeam Merges for Peanuts
So, I guess that means Intel, Cisco, H-P (and by extension Agilent), and Oracle are all shysters?

Does it impact folks with offices in Northern California like Alcatel, Motorola, Texas Instruments, JDSU?

Just curious to understand how far this reaches.

seven
nanobaud 12/5/2012 | 2:01:52 AM
re: Terabeam Merges for Peanuts "All Northern California technology companies might be shysters, but not all shysters are Northern California technology companies."

But that doesn't really support the bitter, resentful attitude that it's meant to. If being a shyster is a voluntary behavior, then shysters will naturally migrate towards the lowest shyster-energy state, NoCal in this example. But there is corresponding elevation of the non-shyster energy state (population density does not seem to be capped here), so the out-flow of non-shysters would not be significant. In equilibrium, almost all shysters would be in NoCal, but not all in NoCal would be shysters.

On the other hand, if all NoCal are shysters, and there are shysters elsewhere as well, it must be something that afflicts us once we are here, and something that we must not be able to avoid (remember, 100% of us have it). If that's the case you should be concerned about us and working to find a cure rather than despising and deriding us. Leper colonies went out of fashion long ago, now we at least try to help the misfortunate, don't we?

nBd
technonerd 12/5/2012 | 2:01:47 AM
re: Terabeam Merges for Peanuts If that's the case you should be concerned about us and working to find a cure rather than despising and deriding us. Leper colonies went out of fashion long ago, now we at least try to help the misfortunate, don't we?

I have some bad news. I am not Mother Teresa.
whatsinaname 12/5/2012 | 2:01:46 AM
re: Terabeam Merges for Peanuts Anybody ever see this one? The title was yanked from LightReading after posting for only a few hours. Somebody at LightReading really had it out for this company....


Terabeam Sucks Security Teat

REDMOND, Wash. -- Terabeam Corporation, a leading
wireless systems, today announced that the Office of Homeland
Public Safety has deployed its Free Space Optics (FSO)
Elliptica(TM), for use in its network in New Orleans.
SEPTEMBER 25, 2003
PREVIOUS NEWS WIRE FEED
technonerd 12/5/2012 | 2:01:46 AM
re: Terabeam Merges for Peanuts REDMOND, Wash. -- Terabeam Corporation, a leading wireless systems, today announced that the Office of Homeland Public Safety has deployed its Free Space Optics (FSO) Elliptica(TM), for use in its network in New Orleans.
How much you wanna bet that:

a) TeraBeam gave that system to the goverment,

and

b) It doesn't work now and never did work
Mr FSO 12/5/2012 | 2:01:41 AM
re: Terabeam Merges for Peanuts Looking through the many press releases it seems that the real reason for the Terabeam situation has nothing to do with the technology , but to do with the grass roots company management and complete lack of market focus.

They were a good focused FSO R&D company at one stage, the crazy amount of funding sent them over the edge, they toyed with several business models but just didnt seem to focus on any of them,whether you selling fruit and Vegetables or Technology you have to set out what it is that your selling and what you want from the marketplace and stay the course... First they were an FSO company, then they played at being a service provider, then they played with MMW , is it no wonder there was a revolution from its core investors ???

Free Space still is a viable and very succesful technology and has been for ten years now, and it is in reality worth about $60- 80 Million a year which is a big jump from $30 - $40 Million in Global sales , back in 1999.

When terabeam secured the funding that they obtained, I and several others who are veterans in the FSO Industry had a good roll around the floor in laughter at the sheer bull **** that was coming out of the mouths of those who live in the West Coast with respect to FSO and how they were going to conquer the world..

None of the super intelligent CEO's of the American FSO vendors had the basic intelligence to hire a single battle hardened 'Real World' FSO Sales Director from several of the very successful EMEA based FSO companies who were doing several million dollar deals with FSO product on a regular basis in the late 90's throughout Europe the Middle East or Africa which is where 80% of the revenue in the FSO market originates from today..

Today the European, Canadian and Israeli FSO vendors are all still here, no pathetic amounts of VC money, reasonable investment and regular sales...

MRV has a great passive product for across the street, PAV are still king of the hill for their 2MB 2KM products in cellular, Laserbit and Lightpointe are battling it out in Asia, and in the low end point to point enterprise market, FSONA are building fully managed Gigabit and STM1 MAN's from Ireland to Asia , Cablefree are having success in Algeria and South Africa...

The Terabeam / YDI merger is good for both companies and I believe that it will be watched for all the right reasons, what is also commendable is the fact that the DH of Terabeam has stated what went wrong and why, which took some metal to do, and should be commended for his honesty.





technonerd 12/5/2012 | 2:01:37 AM
re: Terabeam Merges for Peanuts Looking through the many press releases it seems that the real reason for the Terabeam situation has nothing to do with the technology , but to do with the grass roots company management and complete lack of market focus.
Methinks it also has to do with the technology, which doesn't work farther than a few hundred feet.


They were a good focused FSO R&D company at one stage
Here is the resume of the technical guy behind Terabeam:

http://www.xmission.com/~ralco...

Dig the uncompletely master's in engineering and the honorary Ph.D. at the University of Utah, which of course we all know as the place where the Cold Fusion that now powers the world was developed.

Interestingly enough, at one point the president of TeraBeam claimed that he, too, was been a TV cameraman in Utah. My real question is how on earth did these people manage to get AT&T and Merrill Lynch, among others, to throw all that money into the pot?


the crazy amount of funding sent them over the edge
This has to be the Mother of All Excuses. Too much money. Well boo-f'in-hoo.


Free Space still is a viable and very succesful technology and has been for ten years now, and it is in reality worth about $60- 80 Million a year which is a big jump from $30 - $40 Million in Global sales , back in 1999.
Please correct me if I'm wrong, but aren't the FSO deployments all in these backwater Third World countries where the claims can never really be verified?


When terabeam secured the funding that they obtained, I and several others who are veterans in the FSO Industry had a good roll around the floor in laughter at the sheer bull **** that was coming out of the mouths of those who live in the West Coast with respect to FSO and how they were going to conquer the world.
I have been watching TeraBeam out of the corner of my eye for years. I also would laugh. What still amazes me is the thorough lack of due diligence by AT&T and Merrill Lynch. I also thought the post-9/11 press release was sad and offensive. For me, it crossed a line.


what is also commendable is the fact that the DH of Terabeam has stated what went wrong and why, which took some metal to do, and should be commended for his honesty.
I don't think anyone should ever commend anyone at TeraBeam for their honesty. By the way, what's a "DH?" I really try to stay on top of the acronyms, but somehow I doubt that TeraBeam has the Designated Hitter rule.
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