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Zhone to Buy Paradyne for $184M

Zhone Technologies Inc. (Nasdaq: ZHNE) will buy broadband equipment vendor Paradyne Networks Inc. (Nasdaq: PDYN) in an all-stock deal worth about $183.6 million (see Zhone Acquires Paradyne).

Zhone is issuing 1.0972 shares of common stock for each outstanding share of Paradyne common stock. Zhone says that, based on its closing price on Thursday of $3.57, this values each Paradyne share at $3.92.

The news sent Paradyne's stock soaring from its closing price of $1.89 on Thursday. The stock was up $0.95 (50.26%) to $2.84 in mid-afternoon trading on Friday.

Zhone says the deal will give it a greater product set, lower operating costs, and more cash. Still, following the brief conference call this monring, many questions remain unanswered. There appears to be a lot of product overlap between the two companies, but Zhone officials didn't want to drill down into the minutiae. "Our products are complementary and our customers do not overlap," insists Zhone's CEO Mory Ejabat.

Zhone says its plan is to integrate Paradyne's broadband gear into Zhone's Single Line Multi-Service (SLMS) group of products, while divesting the company's narrowband product lines. Zhone's SLMS line includes its its Raptor ATM/IP DSLAMs, its FiberSlam FTTP (fiber to the premises) product, and its Multi-Access Line Concentrator (MALC), which combines the functions of a Raptor DSLAM, a FiberSlam device, and a digital loop carrier in a single chassis.

Paradyne's technology wasn't a detractor, but it wasn't the primary reason for the deal, either, according to Timm Bechter, an analyst at Legg Mason Inc.. The acquisition will give Zhone geographic expansion, more revenues, new customers, and a little cash -- and it eliminates a competitor, Bechter says.

But that will come at a price, he notes, as Zhone is expecting to integrate Paradyne quickly, with minimal impact on its operating expenses. "To me that says they're going to cut more than half the staff," he says.

Paradyne, interestingly, has many characteristics in common with its new parent. It is a smaller broadband equipment player that emerged as sort of a mini-Zhone in the past few years by nibbling on technology from failed or failing startups.

In 2004, Paradyne bought Net to Net Communications for about $5.8 million in cash and stock (see Paradyne Nabs Net to Net Assets). In 2002 it bought Elastic Networks, a maker of DSL equipment, for about $28.7 million, and it bought the remains of Jetstream Communications, a voice gateway maker, for $3.0 million (see Jetstream Crashes to Earth and Paradyne Gets Elastic).

The 375-person company isn't profitable. But, thanks to a greater demand for DSLAMs and other DSL equipment, its revenues have been growing of late. Its revenues for 2004 were $102.3 million, up 25 percent from its 2003 revenues of $81.3 million.

The company's DSL broadband equipment sales grew from $52 million in 2003 to $75.4 million in 2004, a 45 percent jump.

Paradyne also had a little cash. The company's cash and investments as of March 31 were worth $42.2 million. Its working capital (current assets minus current liabilities) was $64 million as of March 31.

Zhone, meanwhile, is a rollup artist, now on its 12th acquisition with profitability still a ways away. The company's net losses were $35.6 million in 2003, $17.2 million for 2004, and it hasn’t generated positive cashflow from operations since inception.

The company lost $5.1 million on $27.6 million in revenues for the first quarter of 2005. Revenue for Zhone's year ended December 31 was $97.2 million, up from $83.1 million the prior year, putting it on a par with the company it is buying.

On the conference call this morning, the companies did not give any idea how the company's revenues and earnings per share might shape up once the integration of the two firms is underway.

— Ray Le Maistre, International News Editor, and Phil Harvey, News Editor, Light Reading

palaeozoic 12/5/2012 | 3:08:27 AM
re: Zhone to Buy Paradyne for $184M Zhone, the vacuum cleaner of the telecom industry, continues to suck up the orts left over from the tech bubble. Actually, as much fun as everyone has bashing this curious little company, they do the industry a great service: they get rid of companies that otherwise clutter up the market. Save for cash on the balance sheet, once absorbed by Zhone these companies—the employees and products—quickly disappear. Zhone is able to fortify its balance sheet, maintain the revenue level it already has, and live to fight another day.

The only remaining question is: Where is the vacuum cleaner that will rid us of Zhone?
firstmile 12/5/2012 | 3:08:26 AM
re: Zhone to Buy Paradyne for $184M Wow!!!
Can you put two more dysfunctional teams together?
Sean and Morrie sitting in a tree....
too funny.
...first
cyber_techy 12/5/2012 | 3:08:24 AM
re: Zhone to Buy Paradyne for $184M Zhone's market cap is $284 m (and going down daily). How could it acquire a company for $184 m?
OpticOm 12/5/2012 | 3:08:24 AM
re: Zhone to Buy Paradyne for $184M Actually, the first poster was right.
Zhone is the junkyard of the telco system market.
I am amazed that Ascend hoodwinked the market as it did.
All what I know is that the quality of their products was abysmal.
rbkoontz 12/5/2012 | 3:08:22 AM
re: Zhone to Buy Paradyne for $184M Finally - some truth about Zhone on the boards... It's amazing anyone in their "light" mind would want to own this stock. What a track record of 12 acquisitions? I could agree more with Palaeozoic - Zhone, while a POS itself, is doing us all a great service by picking up the trash left curbside post-bubble.
ThurstonHowell3rd 12/5/2012 | 3:08:21 AM
re: Zhone to Buy Paradyne for $184M Ever hear of all Balls and No Brains...?
ThurstonHowell3rd 12/5/2012 | 3:08:21 AM
re: Zhone to Buy Paradyne for $184M Ascend's value when it hoodwink'ed the market is they had Cascade - that was the core value when they sold to LU.

Ascend itself (seperate from Cascade) had all the engineering prowess of Gary Busey on a 3 day bender - i.e. little to none.

I think the Paradyne acquistion should fit well with the Tellium asquisition... not sure why Morrie does it - but at least it keeps him out of the sectretarial pool...
otherhalfoftheworld 12/5/2012 | 3:08:19 AM
re: Zhone to Buy Paradyne for $184M
God be with Paradyne's employees.
IBanker19 12/5/2012 | 3:08:06 AM
re: Zhone to Buy Paradyne for $184M ...and ZHNE's shareholders
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