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