Optical/IP Networks

Zhone to Buy Gluon Scraps

Zhone Technologies Inc. (Nasdaq: ZHNE) is in the process of negotiating a price for the assets of Gluon Networks, Light Reading sources say. The ink isn't dry yet, so specific financial details aren't available. But one former employee of Gluon reckons the deal will close soon, as the talks have been going on since early December 2003.

Representatives of Zhone and Gluon were phoned on Thursday, but neither party called back.

Zhone's product portfolio is a grab bag of access products, include three generations of digital loop carriers (DLCs), a central office DSLAM, and some transport gear. Recently added were a core optical switch and a yet-to-be-discussed metro switching product from Zhone's acquisition of Tellium (see Tellium, Zhone to Merge).

Gluon, which recently closed, had barely begun to ship its CLX product, a next-generation, packet-based Class 5 switch that was meant to compete with the likes of Taqua Inc. and Tekelec Inc. (Nasdaq: TKLC), while uprooting switches from Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT). The company had raised more than $76 million since its inception in 1999.

Our sources say Zhone has recruited and is making offers to about 30 of the 60 employees that were cut on Gluon's final day of business (see Headcount: Job Makers, Deal Breakers). Most of those being recruited are engineers, a source close to Zhone says.

The good news for Zhone is there is definitely a market for Gluon's gear. There are about 1,300 carriers in the U.S., with an installed base of about 24,000 local phone switches, according to industry analyst Kermit Ross, principal of Millennium Marketing.

The next replacement wave of these switches, which includes the conversion from circuit to packet technology, has already begun and will run its course over the next 15 to 20 years, exhausting some $40 billion in capital, writes Ross in his report, "A Switch to Packet: U.S. Central Office Switch Market Brief."

Indeed, carriers want packet-based switches, but some argue they're not beating down the door just yet. A source close to Taqua says that in the fourth quarter, that company sold one packet interface card out of 25 new customer orders.

The bad news for Zhone is that the company isn't getting any cash in the deal, as it did with its Tellium buy. Instead, it's taking on yet another cash drain in the form of more employees and another product line with no significant customers.

— Phil Harvey, News Editor, Light Reading

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