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Infinera, Coriant Hear a $430M Siren Song of Synergy

Phil Harvey
7/23/2018
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The optical networking equipment space, once supporting several multi-billion dollar empires, continues to consolidate. In the latest example, Infinera buys Coriant for $230 million in cash and some issued stock for a total transaction value of about $430 million. (See Infinera to Buy Coriant for $430M.)

Infinera and Coriant say the deal will bring together a very complementary set of assets, technologies and customer accounts.

"The essence of Infinera's competitive edge has always been vertical integration," said David Heard, Infinera's General Manager, Product and Solutions, in a conversation with Light Reading on Monday. "In the optical world, if you can get the highest performance and lowest cost basis and make that agile for use in the network -- that's a good thing."

The struggle for Infinera, Heard explained, is that it's not in a lot of the global Tier 1 carriers. Also, the portfolio matters, too, Heard said. "Having all the way out from 5G, fiber deep, cable through the metro core -- we see a lot of disruption," he said. Because 5G is causing service providers to spend more to put fiber and computing resources out on the edge, adding complementary pieces to Infinera's long haul and metro optical business was attractive.

Infinera execs say the combination takes a vertical integration expert with some big cable operator accounts and pairs it up with Coriant, a company that has a portfolio of different technologies, several mobile operator customers and some Tier 1 relationships as well.

Marlin Equity Partners spent more than $1 billion trying to integrate all of Coriant's technology portfolio vertically. That investment was over the last five years and was aimed at "significantly advance its portfolio to address the growing demand for software automation and open, disaggregated platforms," the company said in a statement. But Coriant still wasn't as vertically integrated as it wanted to be and its new majority owners -- Oaktree Capital Management -- tapped Infinera for help.

The two companies say the acquisition approximately doubles Infinera's revenue and expands the company’s customer base "to serve nine of the top 10 global network operators (five new to Infinera) and the top six global internet content providers (three new to Infinera)." In the investor conference call, Infinera executives said the two companies only overlap in one of each of their top ten customers and, in that customer, Infinera is the incumbent long-haul provider and Coriant is the incumbent metro provider.

According to Heavy Reading Analyst Sterling Perrin, Coriant and Infinera combined to cover less than 10% of the total, global optical networking market share in 2017. Ciena, by comparison, had a little more than 15% and Huawei had just under 30% of the worldwide optical networking market. Perrin said Infinera's motivation was definitely to add some complementary pieces. The long-haul optical market "has slowed tremendously and the metro optical market has been a better growth opportunity," Perrin said.

Coriant and Infinera are almost identically sized as far as revenues. Infinera's 2017 revenues were $740.7 million, down nearly 15% from the previous year. Coriant's 2017 revenues were about $750 million, with approximately $525 million coming from equipment sales, according to Heavy Reading estimates.

On the investor call Monday afternoon, Infinera said that Coriant burned about $50 million in cash in 2017, had to bid aggressively on new deals and Infinera's managers think that the combined company will be profitable with positive cash flow in 2019.

Infinera has come a long way since it first announced a long-haul optical networking transport system that saved money by integrating the key components needed to perform optical-electrical-optical (OEO) conversions during transmission. (See Infinera Declares WDM War.)

The purchase of Coriant is, by our count, Infinera's fourth acquisition. In 2005 the company acquired Big Bear Networks, an optical networking company that was in the process of shutting down. In 2007 it bought Little Optics, a components vendor. In 2015, the company spent $350 million for Transmode Systems, a move that blended its long-haul optical transport capabilities with the Swedish vendor's metro core, edge, and access gear -- putting a full selection of WDM equipment and technology under one roof. (See Infinera Acquires Little, Infinera Bags Big Bear and Infinera Makes $350M Offer for Sweden's Transmode.)

Coriant sprang to life in 2013, when Marlin Equity Partners combined the optical networking businesses of Nokia Siemens Networks and Sycamore Networks Inc. under that single, obtuse moniker that still sounds like a vitamin supplement. (See Sycamore + NSN Optical = Coriant and Coriant Separates from NSN.)

Along the way, Marlin Equity Partners picked up Tellabs and added it to Coriant in a deal that was announced at $891 million. (See: Optical Stock Watch: Tellabs and Tellabs Axes Product, Cuts Jobs.)

Not all are convinced that consolidation necessarily equals a leaner, meaner company because significant company integrations are challenging and, sometimes, messy. In comment on the speculation of a deal in a note to clients last week, MKM Partners analyst Mike Genovese wrote: "[The integration] challenge would likely be particularly acute since many of Coriant’s customers would want to remain on their legacy Coriant platforms, thus not helping Infinera's PIC volumes and margins. Both Infinera and Coriant are low operating margin companies, and there are questionable synergies."

Synergy, though, is the name of the game here. "This accretion will come from $100 million of identified cost savings in both cost of goods sold and operating expenses," Infinera said in its press release. "Total cost synergies of $250 million are expected through 2021, with the continuation of operating synergies and the introduction of vertical integration into the Coriant product line, resulting in a step-function increase in Coriant’s margins."

— Phil Harvey, US News Editor, Light Reading

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Nally
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Nally,
User Rank: Light Beer
11/13/2018 | 11:23:28 PM
Intersting
Could have never thought about it from this perspective but it is possible now after I read all this. Just has some slight information from some assignment help online who made me understand it
brooks7
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brooks7,
User Rank: Light Sabre
7/31/2018 | 12:21:41 PM
Re: It's not about the product
 

Well, the challenge is that entry points in customers have gotten a lot more challenging.  In the old days, equipment types were regularly rebid.  Now, they are not.  It is generally a winner takes all (or almost all) in a 1 round event.  Telcos are saving their sparse lab resources for future looking products.

So for an acquisition like this, the ability to swap over 1 product for another within the same company no longer provides an advantage.  Sparing and maintenance still has to be done on the older products.

This implies that customer acquisition like this is a dicey thing.  The only way it works now is if there is likely to be an entry point in the other product categories soon.  By being an incumbent vendor, you get some benefit in a new RFP.  This benefit is small and some (if not all) the competitors are likely to be incumbents as well.

Scale, on the other hand, might be more useful.  Large Service Providers hate to be a huge percentage of a vendor's business (see what happened at Cyan once the bulk of their rollout at Windstream was completed).  By being bigger, it provides a bit more comfort that they will not put a vendor out of business by finishing a project.

seven

 
sonal99
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sonal99,
User Rank: Light Beer
7/31/2018 | 6:21:35 AM
hello
hii
Business12707
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Business12707,
User Rank: Light Beer
7/31/2018 | 4:03:41 AM
It's not about the product
The big unspoken question in all their talk of the metro vs long-haul portfolio in this acquistion is "What about Transmode?". The whole point of that acquisition (which at $350M was almost as big as this one) was to give Infinera a metro portfolio. The answer is that old sales maxim  "It's not about the product."

These portfolio integration activities are always harder than those selling them to invetsors make them sound - some customers lose products they love and are forced into tough decisions. This acquisition is less about products and more about customer acquisition and scale. Infinera see the opportunity to acquire new customers without competing for them in the open market. They know that they will lose some of them but will have made a judgement about how much they will keep and what that is worth. For Coriant's investors this is an exit strategy. The article states that they have put in $1B and are selling for $450M. Whilst it may have some great products, it is a company on the slide burdened by it's legacy and Infinera will be able to trim costs much more effectively in the combined organisation that Coriant could on its own.
Duh!
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50%
Duh!,
User Rank: Blogger
7/25/2018 | 11:27:28 AM
Re: One to watch
They'll have to manage all of that. Who stays/who goes and when, product roadmap, EOL timing, customer incentives, communications plan, sales training, sales comp plan, etc., etc.  It's do-able, but easier to mess up than pull off.

The Coriant account teams are going to have to tap-dance.
brooks7
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brooks7,
User Rank: Light Sabre
7/25/2018 | 2:17:54 AM
Re: One to watch
Of course, that assumes that customers have any interest in switching platforms...especially if the one that they have installed gets discontinued or roadmap ended.  All that does is open the door for a new round of competition.  One that the company that discontinues the product starts at a disadvantage.

seven

 
James_B_Crawshaw
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James_B_Crawshaw,
User Rank: Blogger
7/24/2018 | 6:04:35 PM
Re: One to watch
It must mean https://soundcloud.com/dropthegroove

 
Sterling Perrin
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50%
Sterling Perrin,
User Rank: Light Sabre
7/24/2018 | 3:26:32 PM
Re: One to watch
Duh! Agreed. They won't talk product at all right now, but it's hard to imagine how they would 1. keep two separate DCI lines going or 2. drop the PIC-based CX in favor of Groove. So that leaves just one conclusion to draw. 

Sterling
Duh!
50%
50%
Duh!,
User Rank: Blogger
7/24/2018 | 1:43:53 PM
Re: One to watch
Note that there is significant product overlap -- for example, Infinera Cloud Xpress2 and Coriant Groove 30. It's not just individuals scrambling to keep their jobs.  It's whole product teams. The logic behind the acquisition depends largely on moving everything to Infinera's Infinite Capacity Engine (CX2 is built around ICE4).  If I were on the Goove 30 team (except for sustaining engineering), I'd be updating my resume about now.
brooks7
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brooks7,
User Rank: Light Sabre
7/24/2018 | 11:21:22 AM
Re: One to watch
@kelsey,

 

Not sure why "later this year" would be a time that the integrated company would get a leg up.

The synergies discussed would generally be an elimination of overlaps in SG&A.  According to the text itself that this is required to get Coriant to be Cash Flow Positive (ignoring one-time transaction costs).  Any product changes are more like the end of 2019 (a year for development at least).

So, what will happen this year is a mad scramble to keep one's job.  Then as things settle out they get back to normal.

seven

P.S.  Hey Phil, my old company part of this deal or do they remain independent as they were (and yes it still exists no matter how much people want to bury it).
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