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Is DragonWave Ripe for Takeover?

Ray Le Maistre
LR Mobile News Analysis
Ray Le Maistre, Editor-in-Chief
1/30/2009

Wireless Ethernet technology specialist DragonWave Inc. (AIM/Toronto: DWI; Nasdaq: DRWI) has drawn up a shareholder rights plan that, in essence, prepares it to deal with a takeover bid.

While the Canadian company noted in a statement issued Thursday that it's "not currently aware of any pending or threatened take-over bid for the Company," it also stated that the rights plan move "is intended to provide the Company's board with adequate time to assess a take-over bid, to consider alternatives to a take-over bid as a means of maximizing shareholder value, to allow competing bids to emerge, and to provide the Company's shareholders with adequate time to properly assess a take-over bid without undue pressure."

It added: "The Rights Plan is not intended to prevent take-over bids that treat shareholders fairly and offer fair value, and permits bids that meet certain requirements intended to protect the interests of all shareholders."

DragonWave, which recently reported a third-quarter operating loss of C$2.8 million from revenues of C$10.7 million, has been listed on the Toronto Stock Exchange since September 2007, but has only just adopted the rights plan. (See Dragonwave Reports Q3.)

It could be a precautionary move as the company's stock has, like many in the telecom infrastructure space, taken a battering in the past year: It closed Thursday at C$1.27, down 75 percent from C$5.03 a year ago, and its price is unchanged Friday. The company, which initiated a restructuring process at the beginning of December last year, has a market value of C$36.3 million. (See DragonWave Cuts Staff.)

CFO Russell Frederick tells Light Reading the move is a reaction to the current "depressed" state of the market, and reiterated that the move is to ensure that all shareholders are treated fairly.

So does the DragonWave board believe the company is more susceptible to a takeover approach just now?

"Those sort of questions do go through your mind, obviously... If it happens we want to have the right amount of time" to deal with any approach, adds the CFO.

While the financial markets may be in the doldrums, DragonWave continues to grow its customer base. The company reported that it shipped gear to 14 new customers, 12 of which were outside North America, during its third quarter (which ended November 30), and it has just announced a new deal in Nigeria. (See DragonWave Wins in Nigeria.)

Its headline customer is WiMax operator Clearwire LLC (Nasdaq: CLWR), thanks to a deal struck with Sprint Corp. (NYSE: S). Clearwire believes that deploying microwave backhaul technology can help it save a significant chunk of its network construction costs. (See Sprint Rides DragonWave for Backhaul and Clearwire's Backhaul Bet.)

And if market projections are correct, DragonWave's core market, Ethernet-based microwave backhaul, is still only in its early stages, and is set to grow significantly in the coming years as wireless service providers build out networks designed to handle increasing volumes of data traffic. There's no shortage of competition, though: A recent Unstrung Insider report identified 14 vendors in direct competition with DragonWave, including Ceragon Networks Ltd. (Nasdaq: CRNT) and Harris Stratex Networks Inc. (Nasdaq: HSTX). (See Ethernet Microwave Starts to Sizzle.)

So could there be any potential M&A action in the air?

One financial analyst suggests to Light Reading that DragonWave likely thinks it is "ripe for takeover," and is doing what it needs to protect itself.

If the company is "ripe" for a bid, who might be interested?

One industry source from the wireline Ethernet technology community suggests that Ciena Corp. (NYSE: CIEN) could be a potential suitor, and notes that the two companies are already deployed together in the Clearwire network, and are believed to be collaborating on other opportunities.

But does the suggestion that Ciena might be a potential suitor make any sense?

Strategically it does, according to Heavy Reading senior analyst Patrick Donegan.

“If Ciena wants to take a sizeable share of the mobile backhaul market, then it will need to look beyond WiMax to the cellular market where there is a mountain to climb dislodging players like Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) that are deeply embedded in cellular accounts worldwide," says Donegan.

"Adding Ethernet microwave to its portfolio would certainly be a departure for Ciena, but it would give the company an integrated value add proposition in the transition to 3G and 4G backhaul that could provide sharper differentiation in this space,” adds the Heavy Reading analyst.

In response to questions from Light Reading, Ciena noted that it doesn't comment on M&A speculation.

When asked if it is collaborating closely with DragonWave on multiple business opportunities, Ciena noted that "Ethernet-based microwave systems are complimentary" to its Ethernet backhaul solution.

"In most cases, operators are building hybrid microwave and fiber Ethernet networks and look to have a single switch vendor in both portions of the network. As a result, we've been asked to work with a number of different microwave vendors, including DragonWave. However, those relationships are typically dictated by the customer," a Ciena spokeswoman added in an email.

— Ray Le Maistre, International News Editor, Light Reading

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