Tellabs' Last Hope: Marlin's Optical Ambition
Marlin Equity Partners' bid to acquire Tellabs was likely the only hope left for one of the industry's longest-standing independent network equipment vendors to survive in some form, according to industry analysts.
In its own press release, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) admitted that it had talked to more than 30 other companies about a deal before accepting the $891 million offer from Marlin Equity Partners . While that once would have been emblematic of company's stubborn will to remain independent, it is now emblematic of desperation.
"There was no growth at Tellabs and no prospects. There was nothing new," says Michael Genovese, communications equipment sector analyst at MKM Partners. "They're basically being sold to the only company that wanted to buy them, and that company didn’t want to pay very much." (See: Tellabs to Be Sold to Marlin for $891M and PE Firm to Buy Tellabs for $891M.)
That's a far fall for a company that looked to be on the cutting edge of vendor consolidation 15 years ago when it paired up with Ciena Corp. (NYSE: CIEN) in a $7.1 billion merger bid that matched Tellabs' TDM strengths with then-upstart Ciena's optical and IP ambitions. Ultimately, that deal fizzled under pressure from Tellabs shareholders, and the company spent much of the last decade and a half resolved to succeed as a mid-sized company in an arena of giants. It also sometimes failed in its efforts to make a smooth transition to optical and IP, while it continued to mine revenue from a fading digital cross-connects market. (See: Optical Stock Watch: Tellabs and Tellabs Axes Product, Cuts Jobs.)
"Tellabs was not quick to jump on the migration away from those TDM products," says Sterling Perrin, senior analyst with Heavy Reading. "They did make small acquisitions, but that hasn't been enough. Now, they're a middling player in a world of much larger vendors with more diverse product sets. At this point, it was going to be very difficult for Tellabs to continue on its own."
While Tellabs recently claimed progress incorporating software defined network capabilities into its platforms, and boasted of SDN "engagements" with customers, Genovese says there wasn't much evidence to back up these claims. "They have talked about SDN and SON [self-optimizing networks], but there was nothing exciting product-wise to back that up," he says. "Their biggest thing recently was optical LAN, which is a slow-moving market." (See: Tellabs Boasts SDN 'Engagements'.)
Though not an outcome worth celebrating, the deal to be swallowed up by a private equity firm for a marginal bump on its closing stock price last Friday is probably the best possible outcome for Tellabs shareholders and employees, who have weathered three years of continuous quarterly losses and many rounds of job cuts and organizational changes.
Private equity acquisitions sometimes lead to further cost cuts and a dismantling of companies and their brand identities as the buyers seek to squeeze out whatever profits they can, but Perrin says that after its acquisition of NSN and Sycamore assets to create an operating company called Coriant, Marlin has crafted a reputation as an optical investor looking to build rather than break up. (See: NSN to Sell Optical Business and Sycamore + NSN Optical = Coriant.)
"I was fairly skeptical of their strategy when they bought NSN's optics, but it really seems like they're interested in investing in optical, and not just cost-cutting their way to greater profitability, which isn’t going to happen in this sector anyway," Perrin says.
The deal matches NSN's packet optical switch and transport assets, including 100G coherent technology, and the customers of those platforms in Europe and other regions with Tellabs' metro core and access products, and its traditional connections to US carriers' customers. "Traditional" is the operative word, in that Tellabs' business with the largest US carriers has been fading away, Genovese says.
"Their AT&T business has gone away, and they've been in sunset mode at Verizon for a long time," he says.
If there is a last hope for Tellabs now, it is in Marlin's ability to integrate Tellabs' assets with the rest of the optical assets it has assembled in Coriant, and to mine the sales connections Tellabs still has North American carriers. "There will be a lot of scrutiny of this deal by Tellabs' customers," says Perrin. "NSN went through the same thing after Marlin bought that business. But, I don’t think customers will flee Tellabs."
"Coriant is not well-positioned yet, but with Tellabs it will be able to compete for more of these deals," Genovese adds, citing Verizon's potential to add a second metro 100G supplier as one such opportunity.
Marlin has not said whether Tellabs will be folded into Coriant or run as a standalone, but the prevailing assumption is that at least some assets are destined for Coriant. Marlin has not yet responded to an email seeking comment.
Perrin also suggests Marlin might not be done consolidating optical assets. "So far, they have a lot of lower-layer transport, but not higher-layer switching," he says. "Marlin could still bolt on more pieces."
— Dan O'Shea, Managing Editor, Light Reading