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VoIP Systems

NexTone, Reef Point (Finally) Merging

After weeks of speculation, NexTone Communications Inc. and Reef Point Systems Inc. have made it official.

On Dec. 2, the companies signed a definitive agreement to merge. The transaction, being announced today, is expected to close in early January, so that NexTone and Reef Point can enter 2008 as a single entity, NextPoint Networks Inc. (See NexTone, Reef Point Join.)

To kick off the merger, the combined company is receiving $20 million in funding led by JP.MorganChase private equity arm One Equity Partners .

American Capital Strategies Ltd. , Core Capital Partners , Jerusalem Venture Partners , Safeguard Scientifics, and Summerhill Venture Partners also participated in the funding round.

If all goes as planned, Reef Point CEO Woody Ritchey would take over as chief executive of the combined company, and NexTone executive chairman David Walsh would serve as chairman of NextPoint's board.

The merger comes as little surprise, considering sources say it's been in the works for months. Light Reading reported on the possibility in late October after the companies announced a joint product, the NextPoint Integrated Border Gateway (IBG). (See NexTone-Reef Point Merger in Works, NexTone-Reef Point Merger (Still) Coming, and NexTone, Reef Point Intro Gateway.)

By combining NexTone's session border controller (SBC) and Reef Point's security gateway functionality, NextPoint would have a "pretty unique play in the market," CEO Ritchey says.

Analysts say the merger could open up new markets for each company's products. Current Analysis analyst Joe McGarvey says the NextPoint IBG is especially well served by a merged entity.

"I think it's a good pairing and that it makes sense from a technical and product standpoint," McGarvey says. "Service providers are converging their networks, and products are converging. So the future of the product is better served by a single company pushing it forward."

Reef Point has raised approximately $47 million since a recapitalization in mid 2006 (and had raised nearly $150 million altogether). Meanwhile, NexTone had raised more than $67.5 million in venture funding, and an additional $25 million through a debt offering. (See Reef Point Lands $21M, Gets Woody, ReefPoint Secures $25M, and NexTone Gets a Loan.)

So is there any hope that investors can eventually cash in on this investment?

Neither company is cash flow positive, although NexTone was close to break-even at the time of the merger, Ritchey says. Even so, he believes NextPoint could turn a profit within a year, and he's willing to mention an IPO, using cautious CEO phrasing.

"Our expectation is that this has a market, from a longer-term perspective, for a potential public offering down the road," Ritchey says.

Among the post-merger question marks is NextPoint's sales strategy. NexTone has traditionally sold directly to its customers, while Reef Point sells through channel partners like Alcatel-Lucent (NYSE: ALU) or Samsung Corp.

Combining the two approaches might help each side expand its market, says Gartner Inc. analyst Akshay Sharma. NexTone, for instance, "has done well in the Tier 2 VOIP peering type companies, but has not really succeeded as well as Acme Packet Inc. (Nasdaq: APKT) in the Tier 1s," Sharma says. The merger "might be able to help them go after that market with Reef Point's help."

It appears NextPoint would not be looking towards layoffs to achieve those dreaded "synergies." In fact, Ritchey says the company is looking to hire in advance of bringing the companies together.

— Ryan Lawler, Reporter, Light Reading

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