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Optical/IP

Let's Make a Deal

Got to love those deals. Even if many of them are tiny, they can’t happen fast enough.

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

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sevenbrooks 12/5/2012 | 2:01:44 AM
re: Let's Make a Deal
Insert favorite startup here has merged with profit challenged company (pretty much everybody but Cisco). How is this a good idea for anybody other than Ciena (overpaying for junk) or Zhone (the telecom world's garbagemen)?

seven
Scott Raynovich 12/5/2012 | 2:01:41 AM
re: Let's Make a Deal sevenbrooks:

It works when its just cash being bought with stock and the cash gets put into stronger hands Better than going out of business.

Also, I thought my writing was pretty clear, I'm saying somebody should take Ciena's cash off their hands, not that they should keep buying.
sevenbrooks 12/5/2012 | 2:01:38 AM
re: Let's Make a Deal
So, people should buy startups because its a cheap way to raise cash? The businesses are worth nada so nuke em and take the cash?

seven
PO 12/5/2012 | 2:01:02 AM
re: Let's Make a Deal It works when its just cash being bought with stock and the cash gets put into stronger hands Better than going out of business.

Better for whom? For the shareholders whose cash is being 'bought'? If they wanted to get into the other business, they would have invested in the other business.

It is a shame that execs treat their bosses -- the owners -- with such contempt. They should return the cash to the investors, and if the business they're running doesn't cut it then shut the doors and send the people off to something that has a chance, even if that's dentistry.
hyperunner 12/5/2012 | 2:00:48 AM
re: Let's Make a Deal PO said:

Better for whom? For the shareholders whose cash is being 'bought'? If they wanted to get into the other business, they would have invested in the other business.

How many of these deals have been pre-IPO compared with post-IPO? In the pre-IPO cases it's only the VCs who lose out. Since they are supposed to be "experts", then it's their own stupid fault :-)

Personally I was appalled by the Tellium deal. I assume the executives at Tellium were simply bought off (with promises to repay their loans, and then some) for their collusion in this deal. Since it's a Mad World, it's fitting that their motto for the deal was "What, Me Worry?".

Then we have the crop of Debt for Equity deals. The biggest one I know about is Marconi. What say did shareholders have in that deal? Zip. And how much are the executives getting in bonuses? I know it's more than $30M.

Good grief, why would you take the risk of running drugs or stealing cars when you can make some REAL money perfectly legally?

hR.
allidia 12/5/2012 | 2:00:33 AM
re: Let's Make a Deal division of JDSU seems more and more likely. JDSU seems poised to leave the fiber optic industry and focus on other commercial markets that aren't eroding. Plus JDSU is becoming a fixture in China anyways.
Tony Li 12/5/2012 | 2:00:13 AM
re: Let's Make a Deal etter for whom? For the shareholders whose cash is being 'bought'? If they wanted to get into the other business, they would have invested in the other business.

It is a shame that execs treat their bosses -- the owners -- with such contempt. They should return the cash to the investors, and if the business they're running doesn't cut it then shut the doors and send the people off to something that has a chance, even if that's dentistry.

----------------

You're assuming that the execs make the decision. In fact, the board must approve it, and the folks on the board are the major stockholders, normally the VCs. So at the very least the deal should be better for the VCs and execs. Of course, if the company is headed for a wall, the VCs would much rather have their funds re-invested than returned. They need their 10 bagger, and only getting 50% back isn't much different to them than 0%. Might as well take the chance...

Tony
sevenbrooks 12/5/2012 | 2:00:02 AM
re: Let's Make a Deal
Since Tellium was a public company its acquisition required a shareholder vote. Now why would you vote for it?

Well, if you were invested in Tellium you were at the roullette table. At least getting bought by Zhone allows you to stay at the table. Cashing out at a loss (probably a huge one) was just not in the cards for Tellium investors.

From a Marconi standpoint, recall that this management team is NOT the management team that got them in trouble. These guys got bonuses for specific financial milestones on the way to recovery. Sorry, but that seems like the right reason to pay bonuses.

seven
lastmile 12/5/2012 | 1:59:58 AM
re: Let's Make a Deal 'They have single handedly killed the components market, by selling below material cost, let alone zero gross margin.'

With 1.6 B in hard cash they will continue to do that for another 5 year's till the competition drops dead.

But that's JMHO

LM

whyiswhy 12/5/2012 | 1:59:58 AM
re: Let's Make a Deal JDSU is run by a bunch of monkeys that 1) have no experience in optics, 2) didn't make it into management in the bubble. They have single handedly killed the components market, by selling below material cost, let alone zero gross margin. Go for the top line, screww the bottom line. Bookeeping tricks have kept their internal balloon of writeoffs hidden. Selling the near-to-burst balloon to Huawei would be par for the course for those losers. And it couldn't happen to a nicer bunch of ex-military dictators.

But that's JMHO

-Why
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