Will Nortel Pick Procket?
Procket has been talking to other incumbent equipment providers like Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Siemens AG (NYSE: SI; Frankfurt: SIE) over the past couple of months, adds the source. He also says that these talks have intensified since Lucent Technologies Inc. (NYSE: LU) announced its partnership with Juniper Networks Inc. (Nasdaq: JNPR) last month (see Lucent Partners With Juniper).
“Everything from reseller agreements to something more substantial has been considered,” says one source, speaking under condition of anonymity.
At this point, a reseller deal looks more likely, because there are plenty of stumbling blocks to an acquisition. A major barrier would be Procket's astronomical valuation in past funding rounds. After a February 2001 funding, for example, the San Jose Mercury News reported that the venture capitalists had given Procket a valuation of more than $1 billion. With acquisitions these days occurring in the $100 million to $300 million range, it's likely Procket investors would have to take a loss on any outright sale of the company.
One Silicon Valley venture capitalist was skeptical of a deal, saying that large liquidation preferences and the amount of cash at the company would prevent investors from approving a deal.
“This effectively prices them out of today's M&A market,” says the VC. “The investors would need to walk away without a return, and possibly a loss, in a situation where they probably still believe in the company and the company has lots of cash.”
Procket would not comment specifically on acquisition rumors, but a spokesman for the company acknowledged that it has been approached to discuss partnerships. Nortel declined to comment on this story.
Some observers think the only way a sale would happen would be if Nortel got a good deal. "It would be a good deal for Nortel if they could get it for $200 million to $250 million," says Scott Clavenna, president of PointEast Research LLC and Light Reading's director of research. "They'd be acquiring a good team and the chips."
One possibility is that Nortel and Procket enter into an OEM arrangement that would also require Nortel to invest in Procket. Nortel could be given the option to eventually purchase the startup after certain milestones are met.
It’s clear why Nortel would be interested in Procket. The telecom equipment giant has never had a successful carrier-class IP routing story. It attempted to build its own core router in 1999 and 2000, but eventually abandoned those plans and partnered with Juniper.
Now that Lucent has also partnered with Juniper, some experts speculate that Nortel will try to fill this hole with another partnership or acquisition of its own. Procket could be a nice fit. The company has spent four years building a hardware platform that can support both edge and core routing features (see Procket Gets Unstealthy).
Unlike many startups today, Procket is not hurting for cash. In June 2001, it raised $250 million, bringing its total to $272 million. With a headcount of 265, the company is estimated to still have about $100 million in cash on hand.
But Procket still has problems. It has won some business in Asia, but it’s been unable to win any deals in North America (see Procket Makes a Splash in Japan). It’s clear that the regional Bell operating companies (RBOCs) are pushing for consolidation, and government integrators are also putting pressure on companies to partner or acquire.
For example, to be considered for the U.S. Defense Information Systems Agency’s Global Information Grid Bandwidth Expansion (GIG BE) RFP that just went public a couple of weeks ago, the successful vendor needs to be able to provide a core device, an edge device, and a strong balance sheet, says the CEO of a startup that is also bidding on the contract (see DISA Deal D-Day Approaches).
“Since very few companies have all three, there has been a lot of opportunity to discuss various forms of partnerships,” he says. “Procket was very active in these discussions.”
An OEM partnership with a large incumbent equipment provider might help, but an acquisition could be a catalyst to get one of these large contracts signed and sealed, says a source close to the company.
The talks come a time when the deal-making climate appears to be heating up. Recently Ciena Corp. (Nasdaq: CIEN) bought WaveSmith Networks Inc. for $158 million (see Ciena Nabs WaveSmith). Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) got Vivace Networks for $135 million (see Tellabs Snags Vivace for $135M). And Alcatel SA (NYSE: ALA; Paris: CGEP:PA) bought TiMetra Networks for $150 million in stock (see Alcatel & TiMetra Seal the Deal).
Before Nortel got serious with Procket, Alcatel was supposedly close to striking a deal with the company. But in the eleventh hour of negotiations, it supposedly pulled out and decided to acquire edge routing startup TiMetra instead.
— Marguerite Reardon, Senior Editor, and R. Scott Raynovich, US Editor, Light Reading