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Optical/IP

Will Nortel Pick Procket?

Nortel Networks Corp. (NYSE/Toronto: NT) and IP routing startup, Procket Networks Inc. are currently in partnership talks, which could lead to an OEM deal or even an acquisition, say sources close to 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

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skeptic 12/4/2012 | 11:55:42 PM
re: Will Nortel Pick Procket? 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.
==================

This number seems unlikely. The rumor-number for
burn rate at procket earlier this year was in
the 6-7m range. There have since been layoffs,
but between the headcount and the all-custom
asics, I dont see how they can get below 5m.

Assuming they have been in operation since 2000,
the total would be 42 months of operation. If
their average burn rate is set at the low
end (assume 5 mil/month), that means they would
have already gone through 210 million out of
272 million. If the average is 6 mil/month,
that means they would have gone through 252
million.

The rough calcuations would suggest between 62
million and 20 million left in the bank.

Either way, I dont see how any calcuation gets
to 100 million left in the bank.


changeisgood 12/4/2012 | 11:55:41 PM
re: Will Nortel Pick Procket? they won't be around on their own at the end of the year. huge burn still, no major accounts and nortel couldn't sell an ip box even if it had a cisco label on it.
skeptic 12/4/2012 | 11:55:40 PM
re: Will Nortel Pick Procket? they won't be around on their own at the end of the year. huge burn still, no major accounts and nortel couldn't sell an ip box even if it had a cisco label on it.
------------------

Their burn rate is so high that, apart from all
the other reasons listed in the article, anyone
who bought them would have to be willing to
come up with around 60m/year (assuming 5m/mo)
just to keep them going.

Its also unclear what someone gets with procket.
For all their talk, they are far from having the
necessary features for an edge router. And
they don't have a stand-out value proposition as
a core router.

the_lord 12/4/2012 | 11:55:39 PM
re: Will Nortel Pick Procket?
Wasn't Procket and NTT? Nothing yet
Wasn't Procket and Lucent? Nothing yet
Now, it is Procket and Nortel....

I'd wear a condom after seeing this company try to sleep with so many others....

skeptic 12/4/2012 | 11:55:38 PM
re: Will Nortel Pick Procket? FYI cash position is well over Skeptic's high number. FACT.

Enough with the speculation. If you don't have facts keep your mouth shut.
--------------
Thats an odd comment considering that the original
article (lightreading) was NOTHING but
speculation without fact.

materialgirl 12/4/2012 | 11:55:38 PM
re: Will Nortel Pick Procket? I hate to sound like a broken record, but if NT needs IP so badly, why don't they buy AVCI, which is trading for cash? The way management is buying their stock back, they seem to think something is going to bail them out. If their products are no good, the stock is too high. If their products are at all competitive, it is too low.
wilecoyote 12/4/2012 | 11:55:38 PM
re: Will Nortel Pick Procket? Skeptic, I have a high degree of respect for you, and my comments are not necessarily directed at you, but you seem to have an axe to grind on Procket, and are usually quick to speculate on their cash position. You have been incorrect roughly three different times on them.

But generally, these boards are packed with speculation and misinformation. It pisses me off. I NEVER post anything I don't know as fact, and generally try and point out the positive attributes of companies struggling to stay alive in tough times.

Procket has interesting technology and a large balance sheet, not to mention a very strong senior management team. There are 200 families depending on the company. Plenty of reasons to be positive on them.

So please don't make speculative comments on a company you don't really know that well.
wilecoyote 12/4/2012 | 11:55:38 PM
re: Will Nortel Pick Procket? Neither side has a choice. Procket needs its stock liquid and valuation will recover when NT goes from 3 to 10. NT needs a router and Procket needs a partner.

This would be a good match.

FYI cash position is well over Skeptic's high number. FACT.

Enough with the speculation. If you don't have facts keep your mouth shut.
Fiberjake 12/4/2012 | 11:55:37 PM
re: Will Nortel Pick Procket? Procket has also forced a 10 % pay cut on all employes. They wouldn't do that if they had 100M in the bank. They must be worried about thier burn rate.

Thanks
Fiberjake
road__runner 12/4/2012 | 11:55:37 PM
re: Will Nortel Pick Procket? "But generally, these boards are packed with speculation and misinformation. It pisses me off. I NEVER post anything I don't know as fact, and generally try and point out the positive attributes of companies struggling to stay alive in tough times."


This statement is the exact opposite description of what you have been doing with your apparent war against cisco (your postings have been filled with non factual rabble rousing misinformation) and your incredibly subjective and derogatory statements against the likes of Lucent.

Amazing level of hypocrisy!

I have to give you that your first statement is spot on though.
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