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Riverstone & Tellabs Bury the Hatchet

Light Reading
News Analysis
Light Reading
10/25/2002

Riverstone Networks Inc. (Nasdaq: RSTN) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) have finally settled their bitter 14-month legal battle, which ended their partnership last summer (see Riverstone and Tellabs in Bustup).

This morning Riverstone issued a press release stating that the two companies had mutually agreed to an out-of-court settlement. According to this agreement, Tellabs will make a one-time payment of $12 million to Riverstone (see Riverstone, Tellabs Settle Lawsuit).

The saga first began in November 2000, when the two companies entered into a reseller agreement. In that agreement, Tellabs was going to resell, co-brand, and help support Riverstone's Internet Protocol (IP) switching gear to sell to the cable MSO (multiservice operators) market (see Riverstone Signs Deal With Tellabs). Tellabs specifically was looking for gear that it could use to help MSO customers build out an end-to-end voice- and video-over-IP network.

The deal made perfect sense. Tellabs would sell an integrated IP/circuit voice portfolio of products into a new market. And Riverstone would have access to a huge sales and support channel.

But things didn’t work out as planned. As the bottom fell out of the telecom industry, service provider plans to build out VOIP networks were put on the back burner. In the contract, Tellabs had agreed to purchase $100 million worth of gear, but by the time the contract was terminated in August 2001, it had spent only $3 million. Most of that gear was never even deployed in customer accounts, says Jean Medina, a Tellabs spokesperson.

Tellabs sued Riverstone in the Chancery Division of the Circuit Court of Cook County, Ill., alleging that Riverstone breached the contract by failing to meet product milestones (see Tellabs Sues Riverstone ). Specifically, Tellabs was not pleased with how Riverstone’s gear handled voice traffic.

“The product didn’t work the way we had hoped it would,” says Medina.

The companies had also agreed that if Tellabs failed to buy all the gear, it would pay 60 cents for every dollar it fell short. So in January 2002, Riverstone countersued Tellabs alleging that Tellabs had not lived up to its end of the deal. It also asked for Tellabs to pay the $60 million it said it was owed according to the contract.

The companies may have decided to settle because of the grim nature of the telecom market. Tellabs last week reported $288 million in sales for the third quarter, 16 percent lower than last quarter's sales and 22 percent lower than the first quarter's (see Tellabs CEO Sees 'Tough Sledding'). It also reported a pro forma loss of $17 million, or $0.04 per share, for the quarter.

“We just wanted to spare our shareholders a lengthy and costly battle in the courts,” says Medina.

But when push comes to shove, it’s really Riverstone that has lost on this deal. The company has been hit hard by the telecom recession, and a $100 million contract would have provided a big boost to its bottom line. So why is Riverstone settling for a fifth of what it says it is rightfully owed?

“We’re very happy with the terms of the settlement,” says Peter Ruzicka, a Riverstone spokesperson. “It would have been expensive to take this further. Both companies decided it was better to handle this outside of the courtroom. It’s a more immediate solution.”

Another reason Riverstone decided to settle may be because its stock has also been pounded lately, which could cause the company to lose its listing on Nasdaq. On October 3, 2002, the company received notification from Nasdaq that its stock had traded below $1.00 for 30 consecutive days, jeopardizing its listing on the exchange, according to an 8K form the company filed with the Securities and Exchange Commission (SEC) earlier this week. The company’s stock must trade above $1.00 for 10 consecutive days before January 6, 2003, to return to compliance.

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com Movers and shakers from more than 100 companies – including Riverstone Networks and Tellabs – will be speaking at Lightspeed Europe. Check it out at Lightspeed Europe 02.

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BobbyMax
BobbyMax
12/4/2012 | 9:28:09 PM
re: Riverstone & Tellabs Bury the Hatchet
It is rather surprising that Riverstone promoted itself to be a start-up simply because it changed the location of its business. It may have helped the copmpany boost up its stock value.

It was an off-spring of cabletron, but this fact was seldom mentioned by the company. The company has attempted to make a big deal of its small presence in the South Korean market.

The company's stock is trading below a dollar, not a very pretty picture.
metroman
metroman
12/4/2012 | 9:28:01 PM
re: Riverstone & Tellabs Bury the Hatchet
Bobbymax

What has this got to do with the price of beans?

Any company would present themselves with the best story they could to sell their products. Cisco have been the top player in twisting reality for many years!

Riverstone was a spin-out from Cabletron but if you were an investor, buying shares, you would have read the Riverstone prospectus. This gave a full and complete account of the state of the company. Your argument about "transparency" is on one hand related to sales and on the other related to stock value. What is your argument?

Riverstone's technology was derived from technology that Cabletron aquired from a startup called Yago Systems. The people who ran Yago, run Riverstone today. So in a way the technology was based on the technology from a startup but they also had a decent customer base. The weakness of the US CLEC market has hurt their business model, but other markets in the world where broadband development is taking off (S. Korea e.g powercomm, Korea Telecom, Hanaro, DACOM) they have done better than anyone in their field.

Just because the revenues derived from these accounts is less than Cisco gets from similar accounts is a reflection of a narrower focus and a smaller product line rather than a lack of ability to obtain volume business.

The stock in my opinion is undervalued! (but I do own shares at a loss at the moment so I would say that!)

Metroman



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