LOCAL BUSINESS
Cambrian sale a high-tech
record for region
James Bagnall
The Ottawa Citizen
Kanata-based Cambrian Systems Corp. started up little more than two
years ago based on the flicker of an idea from Terence Matthews,
chairman and chief executive of Newbridge Networks Corp.
Yesterday, Cambrian was snapped up for a breathtaking $300 million
U.S. ($468 million Cdn) by industry giant Northern Telecom Ltd. of
Brampton.
The acquisition is the single biggest deal ever between two of this
region's high-tech firms.
"Cambrian is a very important acquisition for Nortel," said Nortel chief
executive John Roth. "It completes our portfolio of building what we
think of as the optical Internet," he added yesterday.
The transaction gives Nortel quicker access to specialized fiber-optic
technology it has been developing.
It should also help Nortel consolidate its lead in fiber-optic transmission
systems. Three-quarters of the Internet's long-distance signals in North
America are already carried on fiber-optic pipes built by Nortel.
Cambrian's specialty is shorter-length transmission systems that carry
huge amounts of digital information across cities.
Nortel's purchase has generated substantial capital gains for the investors
in Cambrian, which was valued last May at $48 million Cdn.
For example, Mr. Matthews's 24-per- cent stake is now worth $112
million -- up from little more than $11 million last spring, when Cambrian
did a private placement.
Cambrian's 170 employees collectively own nearly 10 per cent of the
firm while Newbridge holds 40 per cent. Venture capitalists such as
Toronto-based VenGrowth and private investors hold the remainder.
The deal offers some interesting insight into the wealth-creating power of
the high-tech industry.
The transaction itself owes a lot to the unusually civil relationship
between Mr. Matthews and Nortel chief executive John Roth.
Although these two engineers have been key players in the country's
high-tech industry for decades, their firms compete in several key areas
so they only really met for the first time last December.
Mr. Matthews invited Mr. Roth to dinner and talked at length about
personnel projects, including the construction of golf courses, and his
network of nearly 20 start-up companies in which Newbridge holds a
minority stake.
Mr. Roth at the time was clearly intrigued by the startups, known as
Newbridge affiliates.
The two men met again early this year when Mr. Matthews steered the
conversation to Cambrian. Nortel might be able to make use of
Cambrian's technology, he pointed out.
Mr. Roth was intrigued enough to assign his fiber-optics specialists to
have a look.
What they discovered, according to Brian McFadden, a vice-president
within Nortel's optical networks group, was that nearly all of Nortel's
biggest customers were already familiar with Cambrian. More
importantly, they considered Cambrian to be a leader in its field --
known in the industry as dense-wavelength division multiplexing
(D-WDM) technology.
WDM is a technique for splitting light into many colours, each of which
can carry a separate stream of data. The technology allows more
information to be stuffed down fiber-optic channels.
"The market for D-WDM was developing faster than we thought it
would", said Mr. McFadden, "and Cambrian had started about a year
ahead of us".
Nortel at first considered other options, ranging from an alliance with
Cambrian to joint marketing arrangements. Eventually Nortel decided it
had to have Cambrian's technology.
"If you really want to go fast", said Mr. Roth, "You better buy it all".
Mr. Matthews was clearly prepared to sell both his and Newbridge's
stake in Cambrian. But he rejected Nortel's first offer as being too low.
According to one key investor in Cambrian, other potential buyers,
including competitors of Nortel, were starting to express interest. Nortel
eventually came in with a higher offer all parties consider fair.
Did Nortel pay too much? Several analysts contacted by The Citizen
believe the answer is 'no'.
"Seven months ago, Cambrian was a different company", said Paul
Silverstein, an analyst with BancBoston Robertson Stephens. "It wasn't
clear it would have the right product or that it would be out at the right
time. A lot of these issues have been resolved, making Cambrian a lot
more valuable today".
Indeed, Mr. Silverstein predicted last June that Cambrian "could easily
support a market valuation well in excess of $500 million" in 1999,
assuming it hit all its delivery targets for new products.
Nortel is also better placed than Newbridge to take advantage of
Cambrian's technology.
"For a company Nortel's size, whether the payment is $150 million U.S.
or $300 million U.S. is not going to make a great deal of difference",
said Patrick Houghton, an analyst with California-based Sutro & Co.
"Nortel is number one in transport products so it makes sense for them
to have the technology. It has bigger international sales channels it can
push Cambrian's products through", he added.
Nortel can also offer technical support to potential customers from
practically anywhere, 24 hours a day. Cambrian founder and chief
executive Don Smith called factors such as these "the missing pieces of
the puzzle", that would move his product line into hypergrowth.
The Nortel takeover creates some interesting dynamics in the region --
especially considering that Nortel and Newbridge are major rivals in
other parts of the technology world, such as high-speed switching and
fixed wireless products.
For example, Cambrian is finalizing work on a new complex near
Newbridge headquarters on land owned by Kanata Research Park
Corp., a real estate company controlled by Mr. Matthews.
Assuming the Nortel transaction goes through as expected within a
month, this puts Mr. Matthews in the position of being Nortel's landlord.
Nortel said it will transfer 40 Ottawa-area employees to work in the
Cambrian facility.
Nortel is counting on all current Cambrian employees to stay on. Indeed
it has structured its takeover to encourage this. Nortel has offered what
it calls a "floor price" of $240 million U.S. for Cambrian. Then, if the
company meets certain revenue targets it will add another $60 million
U.S. to its price.
"We're hoping to pay every nickel", said Mr. Roth.
It's not clear what, if anything, the sale of Cambrian means for the other
Newbridge affiliates.
Mr. Silverstein said Newbridge is continuing to invest in new startups
and will evaluate existing ones on "a case-by-case basis".
Kanata-based TimeStep Corp., Tundra Semiconductor Corp. and
Vienna Systems Corp. are all considered good candidates for being
spun out in the next year either through an initial public offering or by
being purcahsed outright.
Earlier this year, Newbridge sold its stake in California-based Advanced
Computer Communications for $263 million Cdn., which generated a
net gain for Newbridge of roughly $128 million Cdn.
ACC was Newbridge's first affiliate but it was an unusual one in that it
had a long operating history before it ever heard of Mr. Matthews.
Cambrian in sharp constrast is one of Newbridge's youngest affiliates.
By being in the right place at the right time with the right technology, it
will produce a one-time gain for Newbridge of roughly $175 million.
Along the way, it has raised the bar for all the other affiliates, and given
Newbridge a nice packet of cash in which to invest in new ones. -30- |
