Jack,
Nortel, others pay BIG bucks for optics -
Nortel to Buy Qtera for as Much as US$3.25 Billion
Brampton, Ontario, Dec. 15 (Bloomberg) -- Nortel Networks Corp., North America's No. 2 phone-equipment maker, agreed to buy Qtera Corp. for as much as US$3.25 billion in stock to gain a new product that runs fiber-optic networks more efficiently.
Qtera, a closely held Boca Raton, Florida-based company with no sales, has developed a product that allows phone and data traffic to be sent on fiber-optic networks over longer distances at lower cost. Its staff of 170 and management will keep their positions as part of a new business unit at Nortel.
Nortel wants to outmaneuver rivals Ciena Corp., which is developing a similar technology, and Lucent Technologies Inc. as telecommunications companies seek to carry data faster and more cheaply. Nortel raised its bid after Cisco Systems Inc. made overtures to Qtera, people familiar with the negotiations said.
``Nortel is very aggressive,' said analyst Dana Cooperson of RHK Inc., a San Francisco-based market researcher. ``When there's something they don't have and can't get out fast enough on their own, they'll buy it.'
RHK predicts that worldwide sales of fiber-optic transmission gear, a group into which the Qtera product falls, will surge to US$41 billion in 2003 from US$9 billion this year.
``Qtera will help Nortel build on its lead in optical transmission systems,' said analyst Mike Urlocker of Scotia Capital Markets, who rates Nortel a ``buy.'
Shares of Brampton, Ontario-based Nortel rose 3/8 to 88 1/2 in New York Stock Exchange trading. The shares have more than tripled this year.
Cisco Talks
The acquisition keeps Nortel ahead of Cisco, which is aggressively moving into optical networking and last month said it could buy a company like Qtera in the next 12 to 18 months. Qtera had discussions with Cisco and turned down two lower offers from other companies, the people familiar said. Cisco declined to comment.
``Anyone who has anything of value is going to be looked over by everybody,' said Barry Jaruzelski of consultant Booz- Allen & Hamilton Inc. ``You run a risk by hesitating.'
Qtera Founder and Chief Executive Fahri Diner said Nortel was the most desirable partner. He declined to say whether other companies made offers.
Qtera is the latest maker of a new type of fiber-optic equipment with little or no sales to be valued in the billions of dollars. Cisco bought Cerent Corp., which had first-half sales of US$9.9 million, for US$7.3 billion last month.
Sycamore Networks Inc. sold a 9.6 percent stake for US$284 million in an initial public offering in October, and now boasts a market value of US$19.5 billion. Sycamore had $19.5 million in sales in the quarter ended Oct. 30.
The purchase will be one of the largest for Nortel, which acquired Bay Networks Inc. for US$6.9 billion last year. Nortel also is acquiring Clarify Inc. in a stock transaction now valued at US$3.44 billion.
Columbia, Maryland-based Corvis Corp., a rival startup with a technology similar to Qtera's, also has held preliminary talks with a number of prospective suitors. It declined to name the companies or provide any details from the negotiations.
Soaring Prices
Acquisition prices have soared in the past year. Nortel bought Cambrian Systems Corp., a company that developed a system to boost the capacity of fiber-optic city networks, for US$300 million in December 1998.
Qtera, with operations in Boca Raton and Richardson, Texas, near Dallas, was founded in 1998 by Diner, a former executive with Siemens AG, and four others. Founders and employees hold about 30 percent of the company, meaning they stand to make as much as US$975 million in the acquisition.
Six venture capital firms led by Battery Ventures of Wellesley, Massachusetts, Oak Investment Partners of Westport, Connecticut, and Menlo Park, California-based Mayfield Fund put up a total of US$31.1 million in cash and US$11.9 million in debt financing to get 70 percent of Qtera. They could gain as much as US$2.28 billion from the acquisition.
Nortel said the acquisition won't cut earnings per share next year and will boost them in 2001. The final price will depend on Qtera meeting sales and profit targets. Nortel said it will issue 30 million to 48 million shares to buy the company.
Qwest Tests
Qwest Communications International Inc., which owns a 39,400- kilometer (24,500-mile) fiber network, has completed successful tests of Qtera's product along with similar equipment from Corvis. Qwest is the only prospective customer that Qtera has announced.
Nortel expects other carriers to begin tests in the first quarter and plans to start selling the Qtera product in the second half of next year, Executive Vice President Clarence Chandran said in an interview.
Most of the fiber-optic equipment available today has to break down and reassemble, or regenerate, the signals it carries every 400 kilometers to 500 kilometers. The process, which eliminates noise that builds up in signal amplification, is expensive to set up and operate.
Qtera says its product can transmit data for 4,000 kilometers without a break. That compares with claims of 3,200 kilometers for Corvis and 5,000 kilometers for Ciena, which doesn't expect to have its product ready for testing until April.
Sanford C. Bernstein & Co. analyst Paul Sagawa said Nortel, with its 5,000 engineers, could have developed a product like Qtera's on its own instead of paying out billions. Still, makers of fiber-optic gear in demand and fetching premiums, he said.
Credit Suisse First Boston Corp. was financial adviser to Nortel. Gibson, Dunn & Crutcher of Los Angeles was Nortel's legal adviser, while Qtera used Morris, Manning & Martin of Atlanta as legal adviser.
Dec/15/1999 16:21
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