Calix and Occam all about scale

SEPTEMBER 17, 2010 By Stephen Hardy -- Sources inside and outside of Calix’s planned acquisition of Occam Networks say the deal is all about the necessary scale -- to keep up with Ethernet-based FTTH innovation, to pursue larger customers, and to battle companies such as ADTRAN.

SEPTEMBER 17, 2010 By Stephen Hardy -- Sources inside and outside of Calix’s planned acquisition of Occam Networks say the deal is all about the necessary scale -- to keep up with Ethernet-based FTTH innovation, to pursue larger customers, and to battle companies such as ADTRAN.

Calix announced yesterday that it had agreed to buy Occam Networks for approximately $171 million in cash and stock, or about $7.75 for each share of Occam’s outstanding stock. At closing, which is expected to occur in either the final calendar quarter of this year or the first quarter of 2011, each outstanding share of Occam Networks common stock will be converted into the right to receive $3.8337 per share in cash (without interest) plus 0.2925 of a validly issued, fully paid, and non-assessable share of Calix common stock. The transaction will give former Occam Networks stockholders between 16.5 percent and 18.9 percent of the outstanding shares of Calix’s common stock based on the number of Calix shares outstanding as of September 15, 2010.

Both companies supply access network equipment to Tier 2 and 3 carriers and other customers, primarily in North America. Occam is best known for its broadband digital loop carriers (BLCs), while Calix has enjoyed much of its success with customers looking to deploy PONs. The two companies offer platforms that support copper and fiber (PON and Ethernet point-to-point) networks; each has touted its success in attracting customers who have received broadband stimulus funding (see "Broadband stimulus award winners select Calix for Fiber Forward initiatives across rural Kansas" and "Occam Networks supplies BLC 6000 MSAP to Marquette-Adams Telephone Cooperative for broadband stimulus project" for recent examples).

Despite so much in common, the deal between the soon-to-be former competitors isn’t just a grab at market share, sources at both companies say. Geoff Burke, senior director, corporate marketing at Calix, says that combining his company’s strength in PON fiber technology with the IP and Ethernet expertise Occam possesses will enable the two companies to better keep pace with the carrier transition to IP and Ethernet based fiber access networks. Occam Vice President of Marketing Russ Sharer agrees, saying that merging the two companies’ ONT portfolio as well as integrating the BLCs (which will subsequently become the Calix B Series) under the Calix Unified Access Portfolio and its attendant network management system will provide additional value to customers while freeing engineering resources to tackle other tasks.

Jeff Heynen, directing analyst for broadband at Infonetics Research, also sees technological synergies between the two companies. While Calix had recently added Ethernet capabilities to its C Series multiservice access platforms, Heynen believes several customers preferred Occam’s more mature Ethernet capabilities. Occam also has done better than Calix with broadband stimulus winners looking for point-to-point Ethernet platforms, Heynen asserts. Calix has balanced the broadband stimulus equation with more GPON wins than Occam.

The combined companies also will have a larger base of international customers, which will extend from North America into EMEA, Latin America, and the Caribbean. But there was another catalyst for the deal. As Sharer put it, “It’s about size and scale.”

That size and scale will enable the combined entity to reposition itself, says Heynen. “They pretty much own the Tier 3 space now,” Heynen offers. And with that territory conquered, Calix now has the weight to extend its foothold with CenturyLink (and the business Occam had won with Fairpoint) into other Tier 2 carrier business such as Frontier and the footprint CenturyLink acquires from Qwest.

ADTRAN is the incumbent supplier in these networks. “They’re clearly going hard after ADTRAN,” Heynen says, suggesting that Calix has now positioned itself as a second source for ADTRAN customers, as well as a threat to erode ADTRAN’s position overall in the Tier 2 space.

At what price scale?

The price tag for this scale represents a good deal for Calix, in Heynen’s opinion. “It was a great value for Calix, and maybe Occam sold themselves a bit short,” he says.

However, Sharer dismisses suggestions that Occam management should have received more money for the company as shortsighted. Noting that both parties worked with investment bankers, that the Occam board performed due diligence in establishing the company’s value, and that the purchase price represents a premium on the current share price, Sharer also says that the deal will need to be evaluated in terms of the long-term strategic value of the combined entities before the purchase price can be judged accurately.

More in Business