Nortel nets Cambrian
Hi-tech giant pays up to $300M US for Newbridge
affiliate
By SUSAN TAYLOR, Ottawa Sun
NORTEL Networks' takeover of Newbridge affiliate Cambrian
Systems Corp., a deal worth up to $300 million US, gives the
firm a year-long lead in an emerging market.
But investors and the market won't know until next year if Nortel
put its money on the right horse.
The networking giant bought the firm from Newbridge Networks,
which owned a 40% stake, Terry Matthews, who had 24%, and
venture capitalists and private investors.
Cambrian staff with share options now own 10-15% of the firm
under the deal, which is expected to close within 30 days.
The deal includes a $240 million minimum, with another $60
million contingent on hitting benchmarks for revenue, market
share and orders in 1999.
"It's hard to say if (Nortel has) overpaid ... at this stage I think it's
too early to tell" said Benoit Chotard, an analyst with Levesque,
Beaubien & Geoffrion.
"They're buying a start-up with enormous potential."
What's more obvious is the benefit to Newbridge.
"It's a phenomenal home run," said Gurinder Parhar, an analyst at
HSBC James Capel Canada Inc.
Under the deal, Newbridge will resell Cambrian's technology that
is incorporated into one of its products indefinitely, though it
won't take a share of any profits.
"Their balance sheet will be stronger," said Chotard. "It's a
win-win."
Seeds for the acquisition were sewn earlier this year when Nortel
CEO John Roth met with his Newbridge counterpart, Terry
Matthews, to discuss network standards and business
opportunities.
Matthews said Cambrian's product didn't fit Newbridge's
strategy and the firm couldn't offer the requisite customer
support, Roth said. "It caught my attention as being something
that fit very well with our vision of where the market was going to
unfold."
Cambrian is now testing dense wavelength division multiplexing
systems called OPTera. The technology boosts the speed of data
travelling over short distances in urban centres.
It divides wavelengths of light that carry information over fibre
optics into 32 colours, or streams of traffic. That means 32 times
more data can run through the same pipes at speeds that can
transmit 16 multimedia encyclopedias in one second, for
example.
Nortel will combine its optical technology with OPTera to deliver
the first ring system for metro areas which ensures traffic is
re-routed if there's glitches so service is never lost.
Don Smith, Cambrian's chief executive, predicts the sector will
be worth $2 billion US annually by 2003. Demand is expected to
spring first from North America, followed soon after by
European customers and then South America and Asia Pacific.
Cambrian, which expects to start shipping OPTera early in 1999,
doesn't yet have any revenue.
"We're creating a new market demand," said Brian McFadden,
Nortel's vice-president and general manager of optical network
applications. Five other similar start-ups haven't yet completed
product development.
Cambrian's staff, about 170, will remain under the deal and
Nortel will assign 40 optical network staff to accelerate product
development. Cambrian is now moving into a new tower on
Terry Fox Dr. in Kanata's Research Park and expects the shift to
be complete by Christmas.
The purchase expands Nortel's products for the data market, an
area it staked as its focus last year. Each year, 30-40% more
data is transmitted, much of it over fiber optic lines meant to carry
voice traffic.
Cambrian's technology eliminates the traffic bottlenecks
commonplace in metro areas and corporate campuses spread out
in a city.
Nortel, which carries 75% of Internet traffic in North America on
its optical networks, is weak in urban markets, Roth said.
OpTera's solution offers several advantages. The system drops
the cost of carrying traffic about 30% for phone operators, Roth
said and carries any kind of data.
"Every customer we talked to said Cambrian had figured this
out," said McFadden.
Nortel shares fell 20cents on the TSE to close at $75.50 while
Newbridge shares fell 25cents on the TSE to end at $45.75 |
