Marlin announced today it was acquiring Tellabs for $891 million in cash. Given Tellabs has a net cash position of about $542 million, the actual net cash paid by Marlin will only be around $350 million or about 0.4x projected 2013 sales. As I wrote in a prior post, Marlin is attempting a rollup in the communications equipment market, with a particular focus in the optical transport segment. This rollup strategy in my view will be challenging given the very competitive and R&D intensive nature of the optical market, the market share loss trends and lack of scale of the companies they are acquiring and the integration challenges of combining multiple businesses across different geographies. In particular, neither Tellabs in the metro DWDM market nor NSN Optical in the long haul DWDM market is a scale player vs. their respective competitors. On the other hand, Marlin has the advantages of paying relatively low valuations for the respective optical assets and is buying these assets as the secular growth outlook for the optical market is improving as evident by the financial and stock performance of optical peers such as Ciena, Finisar, Infinera etc.
The history of rollups in the communications equipment market, however, is not very favorable. Companies that have attempted value oriented rollups like Zhone and Genband over the course of many years have shown that communications equipment rollups are difficult to execute even when paying low valuations for the assets. Arris has shown better results in rolling up the cable TV equipment market, although one could argue Arris began its rollup efforts from a better position in terms of relative market share and scale. Finisar, which has pursued a rollup strategy in the optical component segment, has shown volatile results due to very cyclical nature of the optical components market. Ciena’s acquisition of Nortel’s optical assets has proven to be a positive for the company, but much like Arris, this scale driven acquisition was done from a better relative position of scale and market from where Marlin is beginning its efforts.
Prior to the planned acquisition of Tellabs, Marlin had already purchased the optical unit of Nokia Siemens Networks (NSN), which focused primarily in long haul DWDM optical systems, and certain technology assets from Sycamore Networks in bandwidth management, and named the unit Coriant. Tellabs will provide Coriant legacy optical technology in digital cross-connects, which is in secular decline, metro DWDM technology (which is complementary to the NSN long haul DWDM unit), broadband access technology in PON, wireless backhaul data products and a declining services unit. I personally thought Adva or even the Fujitsu Network Communications optical unit would have been better assets for Marlin to combine with Coriant given better scale in metro DWDM than Tellabs, although these assets were likely more complicated to acquire (e.g. price, ownership structure, etc.). Tellabs on the other hand was likely an easier transaction given the company has seen multiple CEO and CFO changes in the past couple of years, had an activist investor seeking a financial exit and the company has been on a consistent downsizing path with a reduction of its total headcount by about 33% in just the past six quarters.
My guess is that Marlin will seek to combine the metro DWDM and Data products from Tellabs with the existing Coriant assets and seek synergies in SG&A and R&D within these businesses. Putting together the NSN optical and Tellabs optical/data businesses can be successful if Marlin is able to reap synergies and reverse share loss trends of both Tellabs and NSN Optical by convincing global Tier 1 service provider customers that Coriant now has scale and technology assets to compete and grow. Tellabs and NSN Optical were at risk of losing Tier 1 customers globally; perhaps together Marlin is betting this can be avoided and turned around. The cross-connect and services unit will likely be run for cash and the Broadband Access unit will likely be put for sale. A company more focused in the Access market and with a decent relationship with AT&T (e.g. Adtran), may see some value in the historical Fiber To The Curb assets Tellabs has in the Bell South region of AT&T as AT&T seeks to upgrade this part of their network in the future.
Disclosure: Any company mentioned in the post may be a client or a potential client of NT Advisors LLC.