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From todays IBD...
Only One Sale, Zero Products, - Here?s why
Redback paid $4.3 billion for a company that won?t
bring in much revenue for over a year
Date :12/02/1999
Author :Rex Crum
Copyright :Investor?s Business Daily
Everyone is familiar with the age-old imponderable about
whether a tree falling in the woods makes any sound if no one is
around to hear it fall.
But what can be said about a company that until Wednesday
hadn?t sold anything, hasn?t produced anything and hadn?t even
been lining up potential customers to buy the products it hasn?t
produced? Does the company really exist?
If that company is Siara Systems Inc., it sure does. And it?s worth
$4.3 billion. That?s what Redback Networks Inc. paid this week, in
stock, for its Silicon Valley neighbor.
The deal is more proof that in the Internet age, this is not your
father?s way of doing business anymore.
"One thing that?s going on is we?re working in Internet time," said
Larry Blair, Redback?s vice president of marketing.
Net time means promise often is more important that production.
"The focus should really be on the market size and revenue
opportunity and not how much we paid for Siara," said Craig
Gentner, chief financial officer of Sunnyvale, Calif.-based
Redback.
Without Siara, Redback can sell into a market that?ll have sales of
about $2 billion in 2001, says Gentner. With Siara? "Our market
goes into the $20 billion range," he said.
The first indicator that this is so occurred, by coincidence, on
Tuesday, when Siara announced its first sale. And not just any
skimpy sale, but one estimated at $40 million, to develop a
network for Broadband Office Inc.
Siara?s value comes from the growing need of telecom
companies and Internet service providers to manage the delivery
of data over many types high-speed networks. Redback makes
what it calls subscriber management systems. It comes in the
form of a "box" of hardware and software that connects to
networks to manage and direct traffic.
Managing Many Network Types
Mountain View, Calif.-based Siara?s value, analysts say, is that
it?s perfecting a way to do this even for data that are traveling
over all kinds of networks, be they fiber optics, fast phone wiring
connections called digital subscriber lines, standard cable and/or
wireless. That?s important for Redback. A typical customer is
SBC Communications Inc. unit PacBell. And PacBell and its
rivals all have to wrestle with all these types of networks.
"The products and technologies of Redback and Siara are very
complementary," said John Armstrong, an analyst with market
researcher Dataquest Inc. in San Jose, Calif. "Redback now sells
mainly to local phone service providers. With Siara, they can sell
to long-distance companies and to nontraditional service
carriers."
In fact, says Blair, with Siara, Redback can fill a void that isn?t
being filled by even the largest telecom-gear makers such as
Cisco Systems Inc., Lucent Technologies Inc. and Nortel
Networks Inc.
Still, despite the Broadband Office deal, it will be awhile before
the merger bears much fruit. Redback Chief Executive Dennis
Barsema says he doesn?t expect to see much revenue from
Siara?s products before 2001. Barsema was unfazed by that
prospect, describing the purchase as "bold, brash and beautiful."
But $4.3 billion?
"Look at the amount of talent out there and the funding (those
companies) are getting," Redback?s Blair said. "There are
extremely talented, veteran teams out there getting massive
capital. You can?t use traditional vision and succeed - and that?s a
big contrast to the old world ways of doing things."
That, analysts say, means if a company wants to be in business
tomorrow, it often must pay a serious price today.
Analysts compare the merger with Cisco?s $7.5 billion purchase
in August of Cerent Corp. and Monterey Networks Inc. That filled
holes in Cisco?s fiber-optic business - sending data as ?light? via
glass-like wires.
"Did Redback pay too much?" asked Dataquest?s Armstrong.
"Cisco paid $7 billion; they were thinking they?d better get in now
or pay a lot more later."
Jim Slaby, an analyst with Giga Information Group, compared the
get-while-the-getting?s-good Internet spending attitudes to a wave
of entrepreneurship 150 years ago.
"Look at the Gold Rush. Levi (Strauss) did great selling pants to
the miners, even if not many people hit gold," Slaby said. "The
people who build the Internet infrastructure now are the ones likely
to sustain their business in the future." |
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