|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | |
JUNE 24, 2004
By Peter Burrows Networking Titans Buy the Future After letting R&D slide during the slump, dealmaking is in the air as the industry's major players grab startups to fill product gaps Four years after the collapse of the telecom boom brought dealmaking to a halt, big equipment makers are again in a buying mood. At SuperComm, the annual schmooze-fest for big telecom providers and networking-equipment makers, which kicked off on June 21 in Chicago, there was a palpable buzz that the industry is finally getting past its funk. Dealmaking was very much in the air. "The bankers were swarming," says Pete Bonee, chief executive of startup Sylantro Systems, which makes software to help telcos offer advanced corporate calling features over the Internet. Bonee met with three different bankers, all sniffing out deals. STRATEGIC FITS. Is this a return to the crazy days of the late '90s, when companies paid billions for unproven startups? After all, the industry has racked up $6.5 billion worth of deals so far this year, nearly as much as the $7.4 billion total for the whole of last year. So far, the answer is no. For the most part, these are necessary, strategic deals, say analysts. The likes of Cisco Systems (CSCO ), Lucent Technologies (LU ), and Nortel Networks (NT ) are eager to get their hands on the technology they need to roll out the next generation of telecom services. These range from Internet-based telephony to digital TV. "The big guys are realizing they have gaps in their product portfolios -- and they're willing to take whatever action necessary to fill them," says Joe Sigrist, CEO of startup Hammerhead Systems, which makes gear that moves the telcos' data services to the Net. ATTRACTING INTEREST. The big companies are caught in a lurch because many throttled back their research and development to get through the bust. From 2000 to 2004, Lucent's R&D budget plummeted 60%, while Ericsson's fell 55%, and Alcatel (ALA ) and Nortel each saw roughly a 45% slide, according to investment bank Bear Stearns. Startups, on the other hand, felt they had no choice but to innovate. Still, with orders scarce, many of these small fry were close to going under. Now, with the Bells and other service providers pushing the big manufacturers to acquire the latest technology, the most promising startups are suddenly attracting renewed interest. Some, including wireless-network maker Airespace and broadband-equipment supplier Calix Networks, have established major partnerships with industry heavies such as Nortel and Alcatel. Others will be purchased once they prove that their technology works as advertised. The most promising may opt for independence and a shot at an initial public offering. Consider Airespace, a strong No. 2 to Cisco in the market for corporate wireless networks. So far this quarter, it has sold more than four times as much gear as it did in all of 2003, says Marketing Vice-President Alan S. Cohen. "INDECENT URGENCY"? There could also be bigger deals as second-tier players look to bulk up and muscle into new markets. That's why Tellabs (TLAB ), a maker of equipment that connects traditional phone networks to the Internet, forked over $1.9 billion on May 28 for Advanced Fiber Communications, which makes broadband gear. To escape the still-depressed optical networking market, Ciena (CIEN ) has peeled off $636 million in the past year to buy four startups. And some bankers expect another billion-dollar deal. "It's a risky business," concedes CEO Gary B. Smith. "But the bigger risk was doing nothing." While most companies haven't overpaid, one exception is Lucent, which shelled out $300 million for tiny Internet telephony software maker Telica in May. The price is roughly eight times Telica's expected '04 sales -- or about twice the multiple of most deals. "It's not necessarily a desperate move," says Steve Coplan, director of merger-and-acquisition analysis for market researcher 451 TechDealmaker. "But it smacks of indecent urgency." Still, there's a big difference between today and the late '90s. The startups being acquired now have real technology to offer -- and buyers have real needs, not just blue-sky visions.  With Roger O. Crockett in Chicago Burrows is a correspondent in BusinessWeek's Silicon Valley bureau
BW MALL
SPONSORED LINKS
Buy a link now!Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
