Silicon Valley
Apr 19, 1999
Tellabs Takes Its Time Finding the Right Match
By Kevin Petrie
Staff Reporter
SAN FRANCISCO -- Like its peers, Tellabs (Nasdaq:TLAB - news) might go shopping for acquisitions. Unlike its peers, the Lisle, Ill.-based telecommunications supplier isn't desperate to buy.
Other telecom firms are rushing to procure Internet technology. In the U.S., Lucent (NYSE:LU - news) , faced with potentially slowing sales of its voice switches, has committed $20 billion in stock to acquiring Ascend (Nasdaq:ASND - news) in a deal expected to close by the end of June.
Meanwhile, European suppliers are trying to buy their way into the U.S. market, likely where the next-generation Internet will be built. Alcatel (NYSE:ALA - news) ADR and Siemens have announced a string of bold acquisitions in the U.S., and just last week, Stockholm-based Ericsson (Nasdaq:ERICY - news) ADR said it will snap up the Silver Spring, Md.-based start-up Torrent Networking for $450 million in cash.
Tellabs learned caution from a failed $7 billion merger with Ciena (Nasdaq:CIEN - news) last summer. Tellabs pulled away shortly after Ciena lost a prospective contract with AT&T (NYSE:T - news) and fell victim to price competition. The Ciena debacle, coupled with a Nasdaq correction, eroded Tellabs' market capitalization from $17 billion to $6.5 billion in three months. Today Tellabs, with a recovered share price, says it would prefer small deals to large ones.
While Its Telecom Peers Buy into the Internet Business ...
Company acquired Terms Product
Alcatel Assured Access Technology $350 million cash purchase Internet remote access
Xylan $1.6 billion cash purchase Gigabit Ethernet and ATM switch
Ericsson Torrent Networking Technologies $450 million cash purchase Internet Protocol (IP) router
Lucent Ascend Communications $21 billion stock pooling ATM switch and remote access
Siemens Argon Networks $300 million cash purchase IP, ATM router
Castle Networks $300 million cash purchase IP/phone switch
Tellabs Develops Its Own Plans
Internal research and development
Product Availability
DWDM for local networks Field tests in summer
ATM transport manager Field tests late this year
Potential acquisitions
Company Market value/financing Product
Fore Systems $2.8 billion on Nasdaq ATM switch, currently selling
NetCore Raised $35 million in private financing Router in field tests
Salix Raised $15 million in private financing IP/phone switch in field tests
Source: Company press releases and web sites.
In the first quarter, Tellabs topped Wall Street estimates by 3 cents a share, increasing profits 52% to $103.7 million and revenue 43% to $470 million -- higher growth than most of its peers. Tellabs can shop from a position of strength. Unlike the Europeans, it has a long history with U.S. carriers. Unlike Lucent, it needn't worry about slowing sales just yet.
One reason is that Tellabs provides carriers with an interim solution to the Internet overload. Its "cross-connects" help their existing networks accommodate burgeoning data traffic. Not for two or three years will carriers shift most of their traffic onto Internet systems and leave behind Tellabs' technology.
"The market is moving slowly," says President Tom Nolle of the consulting firm CIMI Corp.. "But its competitors are moving fast" and snapping up acquisition candidates. So "this is exactly the time that they should be trying to do a deal." Chris Crespi, equity analyst with BT Alex. Brown, adds, "They should pull the trigger pretty soon."
Michael Birck, Tellabs' sure-handed CEO since 1975, is keeping a circumspect stance.
"I wouldn't say that we feel the kind of desperation" of some rivals, says Birck. "We're not on a mission" to acquire. Tellabs is pushing its own R&D effort: For example, this summer it plans to start field tests of a bandwidth-boosting system for local fiber-optic networks that would compete directly with Ciena. Still, Tellabs' business-development group continues scouting numerous start-ups. Birck says the company lacks Internet technology and cannot count exclusively on its own labs.
Tellabs has a fat acquisition wallet, given its rich market value of $21 billion and cash hoard of $811 million.
Analyst John Butler with Prudential, who rates Tellabs a buy, says the company might benefit from adding asynchronous transfer mode switches to its product portfolio. Switches sort individual data messages on networks, while Tellabs' cross-connect systems simply aggregate calls. Butler's firm has no banking ties to Tellabs. Like a few other analysts, Butler declines to speculate about particular acquisition scenarios. But several candidates make the short list.
One possible target is Fore Systems (Nasdaq:FORE - news) , with a market cap of $2.8 billion and revenue of $635 million. Fore Systems is hardly small -- it has a full sales force and legacy business with corporations -- but its technology would make a snug fit.
"Fore would complement [Tellabs' cross-connects] very nicely," says CIMI's Nolle. Already Tellabs has rigged its cross-connects for ATM traffic. Fore Systems might benefit from such a combination: It has superior ATM switches, but as a small company, it has not garnered lucrative contracts with the large carriers that Tellabs has served for years. Many in the industry regard Fore as a prime takeover target.
Queried about Fore, Birck said wryly, "From what I hear, they have halfway-decent technology." A Fore official did not return a call for comment.
Birck says he is particularly interested in network routers, which manage data traffic in a more sophisticated fashion than switches. Wilmington, Mass.-based NetCore is field-testing a router that Nolle says would serve as a nice bridge between Tellabs' current technology and Internet systems. NetCore intends to ship the product by late June. Since Siemens bought Argon Networks last month, NetCore is perhaps the last viable candidate in its niche.
NetCore Vice President John Shaw says the company plans to go public later this year, but would listen to the right buyout offer. He declined to comment on whether the company is currently in talks. NetCore has raised $35 million in three rounds of private financing.
And Salix, a former consulting firm based in Gaithersburg, Md., also is field-testing a switch that handles signals from both voice-based networks and Internet systems. Rivals also are pouncing fast on this sector: Alcatel snapped up its peer Castle Networks last month for $300 million in cash. Similar switch companies include Sonus and Transmedia. Salix has raised $15 million through private financing. A Salix official could not be reached immediately for comment on the possibility of being acquired.
"If I had to fill up my dance card and I were Tellabs, I would acquire NetCore, Fore and Salix," says Nolle. His firm does consulting for numerous communications companies, including those three. Tellabs subscribes to his research. |
