March 23, 2005 Stockholm, Sweden -- Transmode Systems and Lumentis today announced that they will merge to form a new company, under the Transmode name, focused solely on optical networking equipment. Leveraging the product portfolio, customer base, financial resources, geographic proximity, and cultural compatibility of the two companies, the combined entity hopes to become a Top 5 player in the worldwide metro WDM market within three years, reports Lightwave's senior news editor Meghan Fuller.

Both Transmode and Lumentis had independently determined that a merger or acquisition would be the best route to tap into the growing worldwide metro WDM market. Nine months ago, Transmode began looking for a suitable partner, evaluating product portfolios, customer traction, financial compatibility, and strategic vision. Three miles away, Lumentis embarked on a similar mission, and the two companies determined that they were "a perfect fit," recalls Michael Crossey, vice president of marketing and business development at Transmode.

Transmode's current products, the System 1100 C/DWDM Networking platform and the Transmode Service Extender "micro-MSPP" edge aggregation platform, are targeted mainly at enterprise applications. Its target customers are primarily enterprises and service providers offering managed services.

Lumentis' Mentis products are targeted mainly at metro core and regional networks and address the carrier infrastructure market. The Mentis family supports triple play services, mobile transport, SDH/SONET, and carrier's carrier services.

"It's going to be business as usual for the existing portfolios from both companies," reports Crossey. "We have a healthy pipeline of opportunities for each of the products that are in the portfolio, so there's no need to consolidate or discontinue products."

Market opportunity

Independently, each company has grown its revenue more than 100% each year over the last two years. In 2004, Transmode and Lumentis posted combined revenues of $18 million, and they expect the new company to double that this year. "We are growing faster than the market," asserts Anders Lundberg, CEO of Lumentis. "And we can capitalize on the fact that most of our revenue today comes from Scandinavia and parts of Europe. Now the rest of the world is up for grabs, so to speak."

According to a recent report from Infonetics Research (San Jose, CA), the old Transmode ranked number three globally in the CWDM market. When combined with Lumentis, the new Transmode expects to jump to number two, slightly ahead of ADVA. "The only vendor that would be ahead of us is Alcatel," notes Crossey. "That puts us ahead of Nortel and Zhone. The message here is that we have already been formidable competitors in the CWDM space, and this merger allows us to become an even stronger competitor in the overall WDM market, which is where most of the growth is," he says.

Infonetics places the total value of the global WDM market, including both CWDM and DWDM equipment, at $1.5 billion this year, increasing to $2.4 billion by 2008. "This is the segment that we are addressing in the combined company," says Anders. "Our goal is to achieve a Top 5 position for the global WDM market within three years."

Nortel, Cisco, ADVA, Alcatel, and Huawei are the Top 5 vendors in the worldwide WDM market today, as determined by Infonetics Research. Together, these vendors account for 52% of the market. The remaining 48% of the market is divided among 40 to 45 companies, including Transmode and Lumentis. "How do we change that picture?" muses Lundberg. "One answer is that we get together, we get critical mass, and we move away from the pack."

New market strategy

So just how does the combined entity plan to gain market share in North America and Asia? According to Lundberg, the company has devised a three-pronged strategy not unlike the strategy that proved so successful in Europe.

First, the company plans to leverage the combined strength of its direct and indirect sales force. The merger effectively doubles its network of value added resellers (VARs), who will now offer the combined product portfolio.

Transmode is looking to target larger carriers and will do so through its direct sales force. The company recently established sales offices in Dallas, TX, and in Singapore, giving it a local presence in the U.S., U.K., Italy, Germany, Singapore, and Sweden.

Finally, the company is working to establish OEM agreements with key suppliers and has already inked a deal with a major Tier 1 system vendor for the Transmode Service Extender product. The company is negotiating several others that "look promising," says Lundberg.

The merger allows the combined company to prove its financial strength, stability, and long-term prospects. "We have the financial resources in place to really assure our customers, regardless of what markets we're operating in, that we do have the financial stability to be a long-term partner," says Crossey, who notes that this distinction is critical for attracting customers in North America.

Unlike some of the larger optical equipment vendors that were forced to offset declining revenues in optics by diversifying into new markets, Transmode plans to focus on its core competency. "We are an optical networking specialist, really focused on building a profitable business from optical networks," contends Crossey. "We believe this is where our fundamental heritage is. Sweden is a strong market for technology expertise in optical networking and we're going to be building on that. We are keeping our core business an optical networks business."

--MJF