Terabeam Merges for Peanuts
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