| JULY 14-16, 2014

M&A helps companies reshape, consolidate

by Stephen Hardy

Analysts and other observers (including magazine editors) often remark that consolidation would be a boon to the optical communications industry. But the companies involved in mergers and acquisitions (M&A) don�t do so because of altruism, but to achieve strategic and tactical goals. Xtera Communications (www.xtera.com) and Enablence Technologies (www.enablence.com) recently demonstrated how to use M&A to reshape�and keep the consolidation bandwagon rolling at the same time.

Of the two, Xtera is farther along in terms of redirecting its business model. The company began life in 1998 as a supplier of S- and L-band amplification systems. Frustrated by slower than expected sales, Xtera reinvented itself in 2002 as a supplier of DWDM equipment that incorporated its original amplifier technology. The company acquired Metro OptiX Inc. in 2003, but then scaled back its expansion plans to wait out the post-bubble depression. The company used sales in ultralong-haul (ULH) networks, particularly submarine networks, to see its way through to better times.

CEO Jon Hopper, who joined the company in 2004, reinvigorated the Xtera transformation process last year with an eye toward expanding beyond unrepeatered ULH applications. The company purchased Azea Networks, which produced equipment for repeatered submarine networks, last November. A month earlier, the company acquired AscenVision Technologies, a developer of IP networking technology, particularly traffic management technology. The previous August, Xtera purchased the U.K. fixed-line enterprise service and first-line maintenance organizations from AlanDick UK. The assets expanded Xtera�s ability to address the cellular, broadcast, radar/surveillance, and enterprise markets.

The reinvention continued last month with the acquisition of Meriton Networks, a Canadian provider of metro/regional DWDM and Carrier Ethernet transport equipment. Xtera touted Meriton�s R&D expertise in packet optical networking and Carrier Ethernet transport and reconfigurable optical add/drop multiplexer (ROADM) technology, as well as an existing global Tier 1 and Tier 2 service provider customer base. �With this acquisition, Xtera Communications has moved significantly closer toward our goal of being a leading provider of converged Ethernet/IP and optical transport solutions,� Hopper was quoted as saying in the press release that announced the deal.

According to Ken Davison, who held a marketing and business development post at Meriton and will now be Xtera�s vice president of corporate marketing, the Canadian firm�s ROADM expertise was a salient factor in Xtera�s decision to buy the company. �They were looking at a buy or build situation internally in terms of putting ROADM onto their long-haul systems,� Davison said of his new employers shortly after the acquisition came to light. �And we clearly now can complement them and give them the capability to do that. We are in the process of putting a ROADM onto the 7200 [Meriton�s optical switching platform for the metro core] and we can now look at that in terms of integrating that into their system.� Davison said it was too soon to predict when Xtera would offer such an integrated long-haul platform.

The pairing of metro/regional with ULH technology will benefit Meriton�s sales force (which will remain more or less intact) as well as Xtera�s. �We�ve got customers in parts of Europe now who we�ve been speaking to, as we�ve been informing them about the deal, that have been talking to us about the metro side; they now want to learn more about what the long-haul capability of the portfolio is,� Davison said. �We were not able to address that before, so that really is a big plus.�

Meanwhile, Enablence Technologies moved up the food chain when the supplier of FTTH transceiver and aligned component technologies agreed to purchase one of its potential customers, FTTH equipment supplier Wave7 Optics. Enablence will make the buy through a wholly owned U.S. subsidiary for an aggregate price of US$10.5 million and 2,078,385 shares of Enablence common stock. The deal is expected to close by the middle of this month.

From the outside the acquisition of a systems house appears to be a radical redirection for Enablence, but company CEO Arvind Chhatbar sees it as a natural progression. �I think we indicated that we were going to embark on an integration strategy,� he explained at the time the agreement was announced. �What you saw in the past [the company previously acquired photodetector supplier Albis Optoelectronics AG and metro and long-haul component developer ANDevices Inc.] was some of the backward integration. Now you�re seeing a little bit of the forward integration, largely in an area that is very close to us.�

It�s also very close to Enablence�s original customer base�a customer base Enablence plans to continue to serve with its transceiver-level products. Chhatbar isn�t worried about competitive conflicts, however. �Some of the areas that Wave7 [sells in] are areas that others don�t go�they�re niche areas and stuff like that. So we don�t see that as competition.� Those �niche areas� include Europe, the Caribbean, and countries like New Zealand, Chhatbar said�in other words, most of Wave7�s existing customer base is outside of Asia and North America. Rather than trying to grow Wave7�s business in these two major markets (�They do have some North American things, but it�s not as extensive,� according to Chhatbar), �I think our intention is to consolidate where they currently are,� he revealed, �and then see how things play out before making significant changes to the current core strengths.�

In fact, the acquisition will increase Enablence�s ability to serve FTTH systems developers, Chhatbar asserted. �What this does for our company [is provide] a better understanding of the requirements for some of our customers in terms of placing the transceivers in a system by being part of that particular process,� he said. �It actually positions us in a better situation for addressing the needs of the various vendors.�

The use of M&A to help redefine a company�s direction isn�t a recent phenomenon. JDSU�s acquisition of Acterna radically changed the revenue balance between its communications technology and test and measurement divisions; meanwhile, the company also expanded its non-communications offerings. The moves GigOptix has made to leave its original identity as iTerra behind have received plenty of coverage in these pages and on our web site (plug �GigOptix� into our search engine at www.lightwaveonline.com for a full download). Chhatbar for one sees this strategy as good for both his company and the industry as a whole, which means he�s probably not done yet. �We think that is something that needs to be done for a vibrant optical industry,� he concludes concerning his future M&A plans, adding that it�s �too soon to tell� whether such activity could come at the components or systems level.

Stephen Hardy is the editorial director and associate publisher of Lightwave.

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