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Mergers & acquisitions

Nortel Shuts Optical Switch Effort

Nortel Networks Corp. (NYSE/Toronto: NT) has ceased work on the monster all-optical crossconnect it acquired with Xros Communications in March 2000.

"Nortel has decided not to bring the OpteraConnect PX to market," says spokesman David Chamberlin. Nortel had planned to start commercial trials of the switch later this year.

Chamberlin says "dramatic changes in market conditions" caused Nortel to finally throw in its monogrammed Xros towel. Carriers just aren't interested in big optical switches right now (see No Riches From Optical Switches ).

Sources say Nortel had additional reasons to pull the plug on Xros. It's been an open industry secret that the product's R&D was stymied. And given ongoing delays in its most strategic new products, Nortel is challenged to focus its efforts on more mundane OEO solutions (see Nortel's HDX: The Future Under Fire ).

Chamberlin says it's not yet clear what effect closing Xros will have on Nortel's financials, but he notes that part of the company's $12.4 billion June 2001 writedown was attributable to goodwill associated with the acquisition (see Nortel Buys: Reaping the Whirlwind?).

An undisclosed number of employees who worked for Xros have been laid off. Greg Reznick, the startup's CEO, who has been serving as "president of the Xros division" since the buyout, will continue to report to Brian McFadden, Nortel's president of optical long-haul networks, in an as yet undefined role. "What his next role will be is unclear," Chamberlin says (see When the CEO Hits the Road).

Nortel was criticized for paying too much when it bought Xros for about $3.25 billion in stock, a transaction that amounted to paying about $36 million for each of the startup's 90 employees. Nortel scoffed, citing the deal's basis in stock, not cash, and insisting the price was fair (see Nortel Buys a Monster Crossconnect).

Originally, Nortel hoped to release a massive 1000x1000-port all-optical switch via its Xros deal. But as the months dragged on, it became apparent that the technology had some problems. Sources say the 3D MEMS (micro-electro-mechanical system) components on which Xros originally based its design were unique, but impractical to implement in anything except a massive long-haul switch -- exactly the opposite of what the market wants today.

Despite the canning of the Xros project, sources inside and outside the company say Nortel plans to make the best of what it bought. Efforts are underway to merge elements of the Xros crossconnect with smaller switch chips, they maintain. The results, of course, remain to be seen. Meantime, the waters have closed over the once-bright promise of Nortel's "jawbreaking" all-optical switch.

— Mary Jander, Senior Editor, and Stephen Saunders, Founding Editor, Light Reading
http://www.lightreading.com
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jimmy 12/4/2012 | 10:50:49 PM
re: Nortel Shuts Optical Switch Effort Well?
optigirl 12/4/2012 | 10:50:49 PM
re: Nortel Shuts Optical Switch Effort Gea:

You are contradicting yourself here. If you don't why they paid so much then there was obviously a problem. Nortel had been around long enough to know better about how the telecom market works and that is things just don't happen overnight.

Q: Were any of Nortel's customers looking to place an order?

Q: Was there any reason to pay this kind of money? And please don't anyone say that they bought it with stock. There is an issue of dilution as well as carrying assets on the balance sheets that paints a certain picture of their health.

Q: Didn't anyone up there practice any due care to see if this piece of junk actually worked?


Mismanagement by any other name......
gea 12/4/2012 | 10:50:48 PM
re: Nortel Shuts Optical Switch Effort Optigirl:

Well, my point was that acquiring an optical switch product seemed to make some sense on some levels at the time of nortel's acquisition. The price, however, is a different matter.

The fact that there were no customers yet certainly indicates tha the huge price of this thing was rather crazy (unless, of course, Nortel knew their stock was going to tank!!!).

However, I think things seemed to be moving so fast at the time that I think they wanted to make sure they had a product to fit this hole: everyone was talking "next gen packet networks", and indeed some of the big carriers were building out their ULH networks that way (and they did, too! Most notably Qwest and ATT). Nortel wanted a complete product line, and at the time it really must have seemed that deployment of OXCs was immanent.

In retrospect, it would seem like Nortel biggies convinced themselves they wanted an OXC FAST, and found a way to rationalize the high price they had to pay. Although you could probably charaxcterize this as a "big mistake", I don't think it was completly without any context or sanity.
Mr. Mutt 12/4/2012 | 10:50:48 PM
re: Nortel Shuts Optical Switch Effort I may be going out on a limb here, but I would think that folding a 90 person division they paid $3.2B for without making any revenue for the company is fairly significant.

I only wish I was one of the 90. A workers best dream; sell an idea, get bigtime paid, get laid off. Beautiful!
optigirl 12/4/2012 | 10:50:48 PM
re: Nortel Shuts Optical Switch Effort Although you could probably charaxcterize this as a "big mistake", I don't think it was completly without any context or sanity......

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

uh huh.....

Then again, easy for us to sit here and wax poetic about other people's foibles eh?

9954 12/4/2012 | 10:50:47 PM
re: Nortel Shuts Optical Switch Effort Doesn't anyone remember that the day Nortel announced that it was going to buy Xros for $3.24 Billion their Market cap went up over $6 Billion? That was a great day for Nortel. Now of course we see that the answer is not 1000x1000, but smaller in the near term. 80, 128, 256 ports are the answer and Xros designed their box to be 1000+ ports and although scalable down (with some difficulty) the price was way too high. Nortel has to have another player in the wings that will be supplying them with an all optical switch. The Major systems vendors can not afford to leave that area out of their portfolio because the carriers need it because it will save them money on Capex. All optical switching is not dead at Nortel, only Xros is dead at Nortel.
optical_man 12/4/2012 | 10:50:47 PM
re: Nortel Shuts Optical Switch Effort do I smell BCE getting back into the mix............................................................................?
ng_mui 12/4/2012 | 10:50:46 PM
re: Nortel Shuts Optical Switch Effort When XROS announced their product as a 1000x1000
photonic switch it was clear that something smelled, when at the time most people were talking
32x32 or 64x64. And in fact they only admitted
fairly recently the fact that their demo switch was much smaller
in size, and 1000x1000 was the eventual target
rather than something they were capable of doing.
Nortel were naive and greedy, and this was only
one of a series of badly chosen and poorly
executed acquisitions for them. However they
are still in the running with the HDX product,
which is more like what the market wants,
if they can manage to get it out the door.
lumos 12/4/2012 | 10:50:46 PM
re: Nortel Shuts Optical Switch Effort It was very difficult in those heady days to get any type of research that did not predict massive internet growth and bandwidth 'to the moon, Alice'
lumos 12/4/2012 | 10:50:46 PM
re: Nortel Shuts Optical Switch Effort There was no due diligence in 'those days'. Any company that delayed and actually thought about what they were buying would get scooped by their competitors and lose out on the biggest deal of their lives. Hence the mess we find ourselves in now, with massive glut in LH and underuse in lambdas.
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