Let's Make a Deal
This week there were at least three small acquisitions in the telecommunications equipment space. They weren’t big deals, mind you, but enough to take some slow-moving startup players offline.
One deal of note was YDI Wireless Inc.’s purchase of the legendary money-burning machine Terabeam Corp. (see Terabeam Merges for Peanuts).
Make no mistake about it, it wasn’t the flammable technology they wanted – they were after the piles of cash that hadn’t yet reached the incinerator. Terabeam had about $60 million in cash left on its balance sheet, and – assuming YDI can get through the acquisition without more than $20 million of that disappearing – it could take away $40 million or so.
I don’t know these YDI people, but they seem pretty smart. That’s a pretty good deal for a company that had only $9 million in cash, a market cap of $80 million, and 100 employees. Sources in the vicinity of Terabeam say that three quarters of the company has been laid off, putting its headcount under 50, and it seems unlikely that YDI will retain more than a couple dozen of Terabeam’s employees.
YDI will come out of this deal a well funded company. The company’s stock, which trades on the OTC bulletin board, popped more than 30 percent on the news, showing what the market thinks. As it’s beefing up its balance sheet, this deal may well be this company’s ticket to Nasdaq.
Meanwhile, over in the cable space, C-COR Corp. (Nasdaq: CCBL) has scarfed up Lantern Communications Inc. for something under $40 million, or double next year’s revenues, according to the CEO of C-COR. Again, here’s another modest acquisition for a fairly rational price – not the stuff of bubbles.
What’s so good about these deals? The knee-jerk reaction is to say: “So What?” But there’s evidence that the pace of consolidation in the telecom equipment space is accelerating – and that is exactly what’s needed to take out excess capacity, improve pricing, and move the industry forward.
Better yet, such deals will take the remaining assets of small, languishing startups and put them in the hands of more aggressive companies that are actually planning to do something with the resources. Terabeam’s $60 million in remaining funds has a much better chance of being turned into something productive in the hands of a hungry, publicly traded YDI.
There are plenty of other startups – though, granted, they're not all in the category of Terabeam – that might serve as bait for larger companies. At a Light Reading event held here in New York on Tuesday, "The Telecom Recovery: Opportunities Amid the Chaos," Heavy Reading chief analyst Scott Clavenna pointed to a number of small companies that could make for likely acquisitions.
These companies, the full list of which is included in Clavenna's recent Heavy Reading report, "Telecom Investment Opportunies, include Atrica Inc., Équipe Communications Corp., General Bandwidth Inc., Laurel Networks Inc., Sylantro Systems Corp., and Telica Inc.
So what’s left? Some bigger deals for larger piles of cash, perhaps? Sycamore Networks Inc. (Nasdaq: SCMR), anyone? Ciena Corp. (Nasdaq: CIEN)? It's time to winnow out these cash-rich, revenue-poor companies. Sycamore’s got about $700 million on the balance sheet. Ciena’s got $1 billion. Sycamore's not doing much with its cash, and Ciena hasn’t figured out how to stop spending it. Somebody, please, take a look!
— R. Scott Raynovich, US Editor, Light Reading