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.Published Thursday, March 25, 1999, in the San Jose Mercury News
TERM SHEET/SCOTT HERHOLD
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Hold the phone: The Europeans are coming!
BY SCOTT HERHOLD
Mercury News Staff Writer
SHOULD you see a messenger with a three-cornered hat riding through Silicon Valley and shouting, ''The Europeans are coming! The Europeans are coming!'' don't dismiss him or her as a lunatic. In the telecommunications equipment field, the cry is only too true.
Consider that this month there have been at least seven major acquisitions in this arena, worth nearly $4 billion. And five of those have been by two big European telecommunications firms: Siemens AG, the German-based giant, and Alcatel SA, its French competitor. A chain reaction has set in since the big Lucent-Ascend acquisition in mid-January, and a number of local venture firms are profiting nicely.
On March 4, Alcatel bought Assured Access Technology, a Milpitas-based maker of wide-area access switches, for $350 million. Two days before, it acquired Southern California computer networking company Xylan for $2 billion. That was answered by three quick acquisitions by Siemens: Massachusetts start-ups Argon Networks, Castle Networks and Redstone Communications, for a total price estimated at more than $800 million.
Not to be outdone, Maryland-based Ciena Corp., a maker of fiber-optic equipment, announced that it would buy Lightera Networks of Cupertino for an estimated $552 million in stock and Massachusetts-based Omnia Communications for $429 million. Finally, there are rumors that L.M. Ericsson, the Swedish-based telecommunications giant, is sniffing around about acquiring Pennsylvania-based Fore Systems.
One of these deals illustrates how well the VC's have done: Assured Access got $13 million of funding in September 1997 from Mayfield Fund, Sequoia Capital and Worldview Technology Partners. And while the valuation of the firm at that point isn't public, you can generally assume that the VCs multiplied their money quite handsomely in only 18 months.
What's perhaps most interesting, however, are their insights into why the buying spree is occurring. One VC who has thought about this is Mike Orsak, a general partner with Palo Alto-based Worldview. Orsak says that first, the Europeans have recognized the growth of the Internet protocol network -- and the absolute need for having equipment that can run Internet traffic.
Second, he points out that acquisitions themselves re-order old relationships, making further mergers more likely. Alcatel, for example, used to buy gear from Ascend Communications, which is being bought by Lucent Technologies. Because Lucent is a competitor, Alcatel began to look to different distributors, like Assured Access. And once it examined the numbers, it decided to acquire Assured rather than make it simply a wealthy supplier.
Finally, imitation is the sincerest form of flattery: All these companies have seen how Cisco Systems Inc. has grown to a market cap of more than $160 billion through acquisitions. ''The Europeans are way behind Lucent and Cisco, and they realize that datacom equipment companies are going to build the world,'' says former FCC Chairman Reed Hundt, now a part-time venture capitalist with Accel Partners in Palo Alto. ''So the Europeans need to acquire American intellectual talent and hot boxes in a hurry.''
NOTE TO THE STATEMENT: One of the intriguing things about the Siemens-Redstone deal was that Redstone was the first investment ($2 million ) made by the Broadband Fund created by Institutional Venture Partners of Menlo Park. Like a lot of smaller funds formed by venture firms, this is designed mostly to try to cement partnerships. The $30 million Broadband Fund's three investors are Intel Corp., Level 3 Communications and Cisco.
It hasn't escaped anyone's attention that Siemens is a competitor of Cisco. Does this lend irony to the deal? ''They're really not shareholders in the company,'' says IVP's general partner Geoff Yang. ''I don't think they (Cisco) look upon this as selling to Siemens. It's really more about potential relationships.''
FOUNDERS STOCK: Perhaps you think the quickest road to wealth lies in founding an e-commerce company. And perhaps you're right. But one word of caution: A recent study by Advanced HR Inc., a Saratoga company that provides consulting and analysis of pre-IPO companies, found that the share of their companies retained by e-commerce founders is nearly 60 percent less than it is in other industries.
In the 120 companies that the firm studied, e-commerce founders generally retained 9 percent of their companies. Telecommunications company founders retained 15 percent, and other software company founders retained 22 percent. Advanced HR's founder, Dee DiPietro, says the e-commerce founders are caught by the need to raise money and hire the best people quickly. Both needs force them to part with a bigger piece of the pie. ''The short time frame is a key factor,'' DiPietro says. Of course, the lure is that the pie might be bigger. But it must bake very rapidly.
DEAL TO WATCH: Four months ago, NextCard Inc., a San Francisco credit card lender that does business over the Internet, raised $38 million from a syndicate of new investors that included Moore Capital Management, Kleiner Perkins Caufield & Byers, Sequoia Capital and Highland Capital Partners.
Their earlier investors, including Brentwood Venture Capital, Trinity Ventures, St. Paul Venture Capital, and Forrest, Binkley & Brown of Newport Beach, also stepped up in the round. (Brentwood is the top investor, with 21 percent of the company; Moore Capital Management has 10 percent).
So what's next? The company filed this week for a $65 million IPO with the Securities and Exchange Commission. Like a lot of Internet companies, profitability isn't an issue yet. According to its prospectus, NextCard (www.nextcard.com) lost $15.5 million last year. The offering price of the IPO hasn't been set yet. But don't be surprised if it's aggressive. In the last private round, shares went for $12 apiece. The lead investment banker on the IPO is Morgan Stanley & Co. Acting as co-managers are Donaldson, Lufkin & Jenrette, Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray Inc. |
