Zhone Cashes In on Tellium, Part II

The merger between Tellium Inc. (Nasdaq: TELM) and Zhone Technologies Inc. wasn't just about Tellium's cash, executives at both companies say. Instead, the deal came about largely thanks to a new metro product that Tellium has been building for the last several months (see Zhone Cashes In on Tellium).

“I’d be a fool to say the cash wasn’t attractive,” says Zhone CEO Mory Ejabat. “But cash by itself is not a reason to merge with another company. I can raise cash anytime I want.”

At first glance, the two companies seem an unlikely match. Tellium makes core optical switches, while Zhone has a portfolio filled with access products. But Tellium CEO Harry Carr, says his company's new product will bridge the gap between its core switch and Zhone’s access gear.

“I admit the strategic fit isn’t obvious,” Carr says. While Carr won't discuss the new product's details, he did say it is far enough along that carriers are starting to test it. He adds that Tellium is in talks with Cable & Wireless (NYSE: CWP) regarding the new product.

"I think that if we didn’t have that product line, Mory would not have been as excited about this deal.”

"Hopefully, there’s some truth to what Harry is saying," says Tellium-watcher Michael Howard, principal analyst and a founder of Infonetics Research Inc. “They’ve got the core and the access. It’s the metro that’s missing." Howard says he had not previously heard about Tellium’s metro network plans.

Many of Tellium’s optical switching competitors have acquired or developed metro networking products. Some of them are even moving toward filling out a portfolio with Layer 2 and Layer 3 gear.

Ciena Corp. (Nasdaq: CIEN), Tellium’s closest rival, has the MetroDirector K2 it acquired from Cyras (see Ciena's K2: What Problems?). Ciena also recently bought WaveSmith -- with its Layer 2 edge switch, also positioned for the metro market (see Ciena Nabs WaveSmith) -- and the firm is reportedly interested in Catena Networks Inc. (see Ciena May Be Eyeing Catena).

Other companies are also focusing on the metro. Alcatel SA (NYSE: ALA; Paris: CGEP:PA), a big player in the Sonet add/drop multiplexing market, bought TiMetra, an edge routing company (see Alcatel & TiMetra Seal the Deal). Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) bought the MPLS switch routing startup, Vivace (see Tellabs Snags Vivace for $135M). Larger companies like Nortel Networks Corp. (NYSE/Toronto: NT) and Siemens AG (NYSE: SI; Frankfurt: SIE) are often rumored to be looking for metro startup acquisitions.

While Carr and Ejabat say the new products are the driving force behind the merger, Tellium’s $150 million in cash certainly doesn't hurt. Zhone, which began life with $500 million in venture funding, reported $1.9 million in cash at the end of the second quarter of 2003. The company has already used $10 million of a $25 million line of a bank credit. In total, Ejabat says the company has about $45 million of debt.

— Marguerite Reardon, Senior Editor, Light Reading

dodo 12/4/2012 | 11:42:24 PM
re: Zhone Cashes In on Tellium, Part II Let's see Zhone Selected Customers out of the 200 they claimed are:

Arrival Communications (California, US)
British Telecommunications (BT) (UK)
CP-Tel Network Services (Louisiana, US)
Dixie-Net Communications (Mississippi, US)
Etisalat (United Arab Emerites)
Noicom SPA (Italy)
OmniTel Communications (Iowa, US)
SRT Communications (North Dakota, US )
Tricom (Dominican Republic)
Trinity Valley Services (Texas, US)

Tellium selected customer are ???? and I believe that C&W is downsizing its business and we have a slew of players in the so-called arena being targeted.

so where is the beef, if not for the cash?
The VC community has already given nearly 500M to Zhone, if my calculations are exact.
dodo 12/4/2012 | 11:42:21 PM
re: Zhone Cashes In on Tellium, Part II gea

heard that Tellium did submit for the hardware GIG-BE RFP.
lilgatsby 12/4/2012 | 11:42:21 PM
re: Zhone Cashes In on Tellium, Part II Tellium is similar to Corvis...nobody wants 'em, and if they got 'em they're trying to find the least painful way to get them out.

Customers? Prefice this with new customers not of the "directed shares" days and you'll get zero.

TELM is 3 years late to the metro dance, this had better be one heck of a product. Shame on any service provider giving these chaps a look.

gea 12/4/2012 | 11:42:21 PM
re: Zhone Cashes In on Tellium, Part II My post in the previous article on the merger raised this very issue, about creating an end-to-end solution. Presumably, with the smart folks at Tellium, the Zhone folks will be bright enough to realize that GMPLS-provisionability, etc...is the only way to go if they want even a remote chance of surviving.

And speaking of remote chances...I'm still wondering if Tellium is ever mentioned in the context of GIG-BE, and if the Zhone merger increases that probability somehow. Tellium was a key part of the MONET testbed sponsored by Darpa. I've always wondered if Tellium might not get tossed a bone or two. Maybe Zhone knows that and they see this as an 'in'.

Complete, pure speculation on my part here, though.
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