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Tekelec Splashes Out Again

Light Reading
LR Mobile News Analysis
Light Reading
8/20/2004

Tekelec has loosened its purse strings again. (Cue sound of change spilling all over the floor). It's buying OSS firm Steleus in a cash and stock deal worth $56 million, more than twice Steleus's annual revenues (see Tekelec to Buy Steleus).

That's Tekelec's third acquisition of note in the past 15 months, as it has already swallowed up next-gen voice switch vendors Santera and Taqua (see Tekelec Is Buying Taqua and Tekelec Tests Softswitch Waters). Steleus is a different beast altogether, though: Its software is used for network and performance management and works with multiple network types (SS7 and IP), whether fixed or wireless.

The news saw Tekelec's share price dip initially this morning, but recover to $18.20, up 11 cents from yesterday's closing price.

But once it has closed the deal, will Tekelec be able to hold on to the main man at Steleus? While CEO Fred Lax prattled on in today's conference call about the "advancement of our strategy" and the business synergies the acquisition would bring, the deal prompted a very specific question from Lehman Brothers analyst Steve Levy. Could Tekelec hang on to Steleus CEO Rick Mace, seeing as how the top guys at Santera (David Heard) and Taqua (Charles Vogt) had jumped ship after their acquisitions? (See Headcount: The World Needs People.)

In other words, would Lax be lax again in hanging on to a senior body? [Ed. note: That is soooo Sex and the City!]

"The situation is very different," said Lax in the conference call. "[Mace] will be in charge of a new business unit, and we already have a long-standing relationship. Our objectives are well aligned... not to say they weren't [with the other acquisitions], just more so on this occasion." And Mace stepped in to assure everyone that he was "excited."

Besides that bit of intrigue, here are the deal's concrete particulars:

  • Tekelec is paying $56 million -- about $29 million in cash and $27 million of Tekelec stock -- for total ownership of Steleus's business, including 150 staff, most of which are based in France. Pending regulatory approval, the deal should close in the fourth quarter of 2004.

  • Steleus has 100 customers, including France Telecom SA (NYSE: FTE), Teléfonos de México (Telmex), Verizon Communications Inc. (NYSE: VZ), French alternative carrier Bouygues Telecom, French mobile operator SFR, and Orange France (Paris: OGE).

  • The OSS firm also boasts a long-term product development relationship with France Telecom and a marketing partnership with Telcordia Technologies Inc. (see Telcordia Teams With Steleus ).

  • Steleus had 2003 revenues of $20 million, operating costs of $16 million, and gross margins in the mid-to-high 50 percent to 60 percent range. Revenues in 2004 are expected to be between $24 million and $25 million, with "a similar profile for margins and opex," says Lax. That's a drop in the ocean these days for Tekelec, which is approaching $100 million in quarterly revenues (see Tekelec Ramps Up in Q2).

  • Tekelec expects the deal, once closed, to reduce its fourth-quarter EPS (earnings per share) by between one and two cents, but contribute between one and two cents to its 2005 EPS.
Lax says the two companies have been working together already for two years and have won a number of deals together, including this year's contract with Telmex (see Telmex Uses Tekelec Solution). "As a result, our product roadmaps are already aligned, and that will make integration easier," says the CEO.

Tekelec is about to engage in further M&A activity, though of a different kind. It currently holds a stake in Telica Inc., but that is due to transfer to Lucent Technologies Inc. (NYSE: LU) any day now, as the giant vendor completes its own softswitch vendor acquisition (see Lucent Buys Softswitch Vendor Telica).

Tekelec also owns a slice of BroadSoft Inc., which might end up in Lucent's hands as well (see Lucent to Buy Broadsoft? ).

— Ray Le Maistre, International News Editor, Light Reading

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