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Optical/IP

Who Will Pick Up Polaris?

Word on the Street is that AT&T Corp. (NYSE: T) is testing Polaris Networks' optical switching product and likes it so far. But for any chance of a deal, AT&T wants Polaris to find a big partner.

These days, this has become standard operating procedure for a startup. Think you got the goods to sell to an ILEC? Better find somebody to buy you -- or at least to provide a sales and support channel.

“It’s a no-brainer for the startup,” says Simon Leopold, an analyst with Merrill Lynch & Co. Inc. “And for a larger company, they get to leverage their sales channel and existing relationships without pouring money into R&D.”

One source in the know says that two large players are serious about an outright purchase of Polaris: Ciena Corp. (Nasdaq: CIEN) and Cisco Systems Inc. (Nasdaq: CSCO).

Ciena has already won a contract with AT&T for its CoreDirector product. It's not clear whether AT&T would consider Polaris's OMX Optical Transport Switch for the same purpose as Ciena's CoreDirector.

Other potential partners include Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Fujitsu Ltd. (KLS: FUJI.KL), and Lucent Technologies Inc. (NYSE: LU), but these seem less likely.

Sab Gosal, director of product marketing for Polaris, agrees that the company will likely need some sort of partner. While he would not confirm that the product is being tested at AT&T, he says partnerships will be necessary to win business.

“Customers question our size, our financial sustainability, and our customer support,” he says. “We’re getting feedback that the technology is right, but they want us to have some sort of partner. And it’s not just RBOCs and IXCs -- even the smaller carriers say it would be good for us to have some support partner.”

But Gosal denies that Polaris's discussions with big partners have already progressed into acquisition talks.

“It’s really too early for any discussions about M&A,” he says. “We’re focused on getting the product through trials right now.”

One question about a combination with a larger company is potential product overlap. For example, in some ways, Polaris’s OMX Optical Transport Switch, which grooms to the STS1 (52 Mbit/s) level and scales to multiple terabits worth of capacity, could be a head-to-head competitor with Ciena's CoreDirector. Others say it's more of a digital crossconnect, in the market of the Titan 5500 product from Tellabs Inc.. Cisco just announced its own optical switch (see Cisco Launches Metro Switch).

Gosal says that, unlike Ciena's CoreDirector, the OMX can carve up traffic into even smaller increments than STS1 (see Polaris Lifts Off). He claims because the OMX can handle grooming down to the VT1.5 level, it competes squarely against Tellabs, rather than the other optical grooming switch vendors.

It is possible that Polaris could strike a smaller deal, such as a reselling or marketing agreement. One of the most notable partnerships out there is between ADVA AG Optical Networking (Frankfurt: ADV) and Fujitsu. Fujitsu is reselling ADVA’s gear under its own name, and it is working on development and management integration with its own products (see Fujitsu Brings ADVA Stateside). Fujitsu is even taking on the expense of bringing ADVA’s product through the expensive Osmine certification process, says Merrill Lynch’s Leopold.

The big question about M&A is whether certain players have the time and resources to buy Polaris. Ciena, for example, is still working to integrate the products it acquired from ONI Systems earlier this year (see Ciena and ONI: Wedding of the Year?). It also just announced today that it is laying off another 450 employees (see Ciena Cuts 450 Jobs).

Then there is Cisco. It has plenty of cash to make a deal. And Ray Kao, Polaris’s CEO and CTO, has already been involved with two startups sold to Cisco: TransMedia and Stratacom. But recently Cisco has been focusing its acquisition strategy on spin-ins (see Cisco Goes for an Open-Source Spin and Cisco Buys Andiamo).

Tellabs is also in a good cash position, but it’s unlikely that it would buy another product that would compete with the Titan 5500 and its new Titan 6400 acquired from Ocular. Lucent and Nortel Networks Corp. (NYSE/Toronto: NT) are probably out of the question, as these companies are struggling to turn themselves around. Alcatel, Ericsson AB (Nasdaq: ERICY), Siemens AG (NYSE: SI; Frankfurt: SIE), and Sycamore Networks Inc. (Nasdaq: SCMR) all have the cash, but it’s unlikely they would dish out big bucks for a company without any revenues.

“You really need customers today for anyone to consider acquiring you,” says Gosal. “Look at Ocular. They only got bought after they had contracts in place. Before that, I don’t think anyone would have touched them.”

In fact, the Ocular story could be the template for a Polaris deal. Ocular was trying to get its product into the Verizon Communications Inc. (NYSE: VZ) network. Verizon liked the product but told Ocular it needed to find a big partner. And that's when Tellabs announced it would buy the company for $355 million (see Tellabs Nabs Ocular).

— Marguerite Reardon and Phil Harvey, Senior Editors, Light Reading
www.lightreading.com
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Litewave 12/4/2012 | 9:43:54 PM
re: Who Will Pick Up Polaris? The Ciena possibility is particulary interesting, because Ciena itself is trying to land a deal with AT&T for its CoreDirector optical switch. It's not clear whether AT&T would consider Ciena's switch and Polaris's OMX Optical Transport Switch for the same purpose.

Trying?

http://www.att.com/news/item/0...

MR, PH, very sloppy reporting. Whats the problem, not enough hours in the day?
M. Yost 12/4/2012 | 9:43:50 PM
re: Who Will Pick Up Polaris? It's not sloppy reason. LR, how much did Polaris pay you for the article?
Twistall 12/4/2012 | 9:43:48 PM
re: Who Will Pick Up Polaris? I think Polaris is getting moused around by AT&T. "T" makes noise about, "Gee, Polaris looks pretty good..." to put some leverage on the big boys competing for the same contract. "T" knows full well that no small outfit can afford to put up with their monopoly-think way of doing business. "If we could just get this feature, you'd really have something, then..."

I don't see anyone buying Polaris without a major contract win. The big guys all have their own versions of what Polaris makes, and given the current business environment, they're anticipating that Polaris will die on the vine.

I don't think the big guys have any fear of startups these days. Some are too busy just staying alive, while the others know that they can just buy the market share should a startup be able to pull off a big win. You can't just be better, you have to be ten times better.
BobbyMax 12/4/2012 | 9:43:47 PM
re: Who Will Pick Up Polaris? Established carriers never buy anything from start-ups. It has been a time honoured tradition. There are enormous risks in buying from start-ups. These risks include: reliability of product, usability of the product, interoperability problems, non-compliance with present and future problems, fault and recovery problems, interface problems, support problems, company may not survive. This list is a partial list.

Even if Polaris is acquired by a relatively known company, the product risks do not disappear. It is almost impossible to find an alternate supplier if a product is bought from a start-up.


The cost of buying a start-up is expensive and it is even more expensive to integrate the company's product and personnel.

The reason Cisco was able to accumulate a lot of money because of lack of competition in the early days and enormous prophet margins.

AT&T, because of its current economic and business prospects, would be bettet off from buying a well estabilshed companies
indsavvy 12/4/2012 | 9:43:45 PM
re: Who Will Pick Up Polaris? Drivel - sure, go ahead and buy from well established companies like Lucent, Nortel and Alcatel. Who knows how long they'll be around?

If you want innovation, buy from the startups. With the right partner, there's no more risk in dealing with the new as there is in making do with the old.
indsavvy 12/4/2012 | 9:43:44 PM
re: Who Will Pick Up Polaris? citpo wrote -

Carriers won't buy anything for long time, startups or established, it doesn't matter.

We'll have to see if you're right citpo. The industry is in a grave condition right now. It will be close to death if what you say is true. I don't agree.

- savvy
citpo 12/4/2012 | 9:43:44 PM
re: Who Will Pick Up Polaris? >>If you want innovation, buy from the startups. >>With the right partner, there's no more risk in >>dealing with the new as there is in making do >>with the old.

Not sure how you can make the equivalent that startup == innovation. Most of startups win by speed to market and cost of product. Most of the innovative ideas used in startups were from big companies like Lucent/IBM/Xerox...

Carriers won't buy anything for long time, startups or established, it doesn't matter.
Buttercup 12/4/2012 | 9:43:43 PM
re: Who Will Pick Up Polaris? *sigh* - if I were LR, I'd be sooo embarrassed. CIEN has had a CoreDirector contract with T for quite some time now - everyone and their baby in this industry know that. If CIEN is interested in Polaris, it's probably for gaining access to RBOCs and using that as potential pull-through for the CoreDirector.

Buttercup
Tim Ber 12/4/2012 | 9:43:41 PM
re: Who Will Pick Up Polaris? The carriers are holding the industry hostage. They want deregulation. Until they get what they want, there won't be any spending on anything. Being a monopoly certainly has it's advantages.
willywilson 12/4/2012 | 9:43:39 PM
re: Who Will Pick Up Polaris? Established carriers never buy anything from start-ups. It has been a time honoured tradition. There are enormous risks in buying from start-ups. These risks include: reliability of product, usability of the product, interoperability problems, non-compliance with present and future problems, fault and recovery problems, interface problems, support problems, company may not survive. This list is a partial list.

-------

This is basically true. Now that the CLECs are almost dead, most of the startup telecom equipment companies can kiss their asses goodbye.
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