Timing is all. When optical and backhaul vendor Tellabs acquired packet core start-up WiChorus in late 2009, it seemed like a bold move to extend its reach further into the carrier network, in tune with the need to create end-to-end, intelligent IP platforms. But the deal came as WiChorus’s initial market, WiMAX, was about to collapse, and less than three years later, Tellabs pulled back to its core markets. Now it is to be taken into private ownership after years of financial tribulations, and it seems that its new owner, Marlin Equity Partners, may have timed its $891m acquisition far more cannily.
This is the third purchase in the optical space for Marlin, which has already bought NSN’s transport division and part of Sycamore Networks. These units have been combined under the ‘Coriant’ brand, and presumably Tellabs will join them, allowing the owner to do what private equity firms do best, achieving synergies in order to make several entities into more than the sum of their broken parts. That will make Marlin a serious player in the optical equipment space, just as there are signs of revival in that segment.
That is being driven by the data explosion and the expansion of all-IP networks, but particularly by LTE roll-outs, which have been more rapid, in many territories ‘ notably the US ‘ than ever expected. Mobile broadband, as well as cloud computing, are the two big shifts driving operators to embrace converged optical/packet architectures for backhaul and transport, and that is finally providing a boost for players like Tellabs.
The company is well-positioned, technology-wise, for those converged architectures and to support carriers’ LTE and LTE-Advanced roll-outs. In March 2012, it upgraded its 7100 and 7300 fiber optic products, and its three smart mobile backhaul units, to support a move to LTE and LTE-A without a ‘forklift’ upgrade. These 4G features could be turned on incrementally as required, and the products could be mixed and matched with different generations of the 8600, including Ethernet and IP-VPN.
This product strategy, which has been built on since, was attractive in terms of price/performance and flexibility, but sadly, it proved too late for Tellabs to harness that strong strategy for independent turnaround. Timing has plagued it all along. In 2012 it was hit by slowing business from its largest customer, AT&T, while Marlin is buying it just as revenue from that operator looks set to increase again. More broadly, Tellabs attempted an ambitious expansion plan in the teeth of the global recession, and even when LTE drove the industry’s fortunes upwards again, it had too far to clamber back.
So now it will become part of the Marlin portfolio, and at least it seems that the equity firm is determined to build a competitive optical and backhaul player rather than just slashing, burning and selling on its purchases. That was the expectation of some analysts when Marlin bought NSN’s transport division, home of the Liquid Transport products, last December. But the $15bn sector is in growth mode again, and Marlin is assembling a broad offering, including NSN’s hiT 7300 100Gbps platform and hiT 7100 packet switch, which had about 200 customers, and now the Tellabs range, and its position at Verizon, AT&T and Vodafone. “It’s a very smart deal. Marlin is a company that is going to be a winner. They are scavenging around like a vulture and consolidating these small optical businesses and are going to cut massive expenses,” activist shareholder Robert Chapman of Chapman Capital told Reuters.
The combined Marlin/Coriant portfolio will create a specialized supplier, but one with sufficient scale to compete more effectively for tier one business than any of the three elements could alone. It will focus on products across Layers 1-3, spanning broadband access, switching and routing, and optical networking. However, there will be challenges in managing the merger, and synergies will only be maximized if product overlaps, such as the two firms’ respective OTN switches (both called 7100) are smoothly ironed out, and if conflicts of interest in partnerships are addressed ‘ notably Coriant’s alliances with Juniper and ADVA, which compete head-on with Tellabs.
Marlin appears to have got a bargain with the $891m deal, while Tellabs’ shareholders will be relieved to have found a home at last, given that they had reportedly tried to sell the firm to about 30 candidates ‘ reportedly including the giants of this field such as Ciena, Cisco, Huawei and Alcatel-Lucent. The offer of $2.45 a share is just 4.3% higher than Tellabs’s closing price on Friday.
Tellabs had posted 11 lossmaking quarters in a row and last year, its pressures ‘ over-reliance on a few carriers, carrier consolidation, the difficult shift from legacy to 4G platforms, the poor timing of the WiChorus move ‘ were worsened last year when its CEO Rob Pullen died of cancer and its chairman Mike Birck stepped down, having been diagnosed with leukaemia. Birck, Tellabs’s co-founder, remains the company’s second largest stockholder and is supporting the deal.
His successor as chairman, Vince Tobkin, said in a statement: ‘This transaction will deliver to Tellabs stockholders certainty of value and liquidity, immediately upon closing.’ Tellabs shares rose 3.8% to $2.44 on the news, having risen 3.1% in 2013, prior to that, on acquisition hopes.
According to Ovum, Tellabs currently ranks twelfth in the optical networking market, ninth in service provider switching and routing, and seventh in the PON, putting it in twelfth place in the overall wireline equipment market in 2Q12 with 2% share of a $40bn segment. This is down from eighth ranking at the end of 2010. Since then, revenues from optical networking, switching and routing products have fallen in every quarter, pushing annualized revenues down 49% to $637m in Q213, from $1.25bn in Q410. Most of the drop-off can be traced to loss of business at Tellabs’ largest customers, AT&T and Verizon, which have been transitioning to platforms from Alcatel-Lucent and Fujitsu, respectively.
Ron Kline, principal network infrastructure analyst at Ovum, still thinks Marlin has made a good purchase and indicated its seriousness about building an optical powerhouse. He commented: ‘Despite its recent struggles Tellabs has a number of product capabilities and core competencies and intellectual property that will complement the capabilities in Marlin’s Coriant portfolio. While there is some overlap in optical networking technologies, such as ROADM and OTN switching, Coriant has been focused on the regional/core network while Tellabs has been focused in the metro. Tellabs also has products and expertise in IP/MPLS routing, carrier Ethernet and PON that will significantly strengthen Marlin’s portfolio.’