Telecom Vendors Ripe for Picking

By John Mulqueen  |  Posted 2001-07-02

Many communications equipment vendors are worth less on Wall Street than the cash in their bank accounts — and that usually means takeovers and mergers arent far off.

Some of these companies, including DSet, Orckit Communications and Tut Systems have money and short investments that are worth three times their shares, making them ripe pickings for acquisitors that can "buy them with their own cash."

DSet, a gateway supplier, turned the tables last week and announced a merger with ISPSoft, a Lucent Technologies spin-off that provides Internet Protocol (IP) network provisioning and management software to carriers. DSet will pay ISPSoft $1 million, assume its debt, provide interim financing and pay additional money if certain goals are met.

That model will be seen increasingly this year when stock prices are depressed, said Robert Abbe, a managing director at Broadview International, a firm that specializes in mergers and acquisitions.

The DSet deal is one small sign that consolidation is beginning in the equipment industry, but major activity is months away, experts said, and will likely be confined to small and midsize companies. The big corporations — Cisco Systems, Lucent and Nortel Networks — are too busy getting their own houses in order to take on new companies.

DSet, which has been struggling in its own market — supplying gateways to cash-strapped carriers — is using the merger to move into another similar market, IP provisioning software. But that may not be the model other companies will follow.

"For the rest of the year, companies are only going to be looking at acquisitions that are accretive, that improve both the top and the bottom lines," said Edgar Jackson, a securities analyst at U.S. Bancorp Piper Jaffray. "The acquisition has to be strategic."

Just because a companys market value is less than the cash it has in the bank does not mean it is a takeover candidate.

Craig Collins, chief financial officer at CoSine Communications, an optical gear vendor, said the critical issue is not the stock price but how long a company can survive without having to raise more money. CoSine has enough cash to last almost three years even if its revenue growth is only modest, he said.

Some vendors may not make it at all. General DataComm, for example, has posted five years of operating losses, sales are down 33 percent and it has only $800,000 cash in the bank.

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