Optical Networking Price of Deal Widely Judged Worthwhile For Expansion Into Fast-growing Market

The Financial Times
Copyright © The Financial Times Limited

At nearly Dollars 30m for each employee, Lucent's Dollars 4.5bn acquisition yesterday of a two-year-old private company with only 160 employees might seem steep.

Wall Street, however, took the deal in its stride, judging this to be a justifiable cost of entry into a fast-growing part of the optical networking business.

The US telecommunications equipment maker said it would issue 78m shares to acquire Chromatis Networks, which is headquartered in Virginia but has its main research and development facility in Tel Aviv.

The deal, which had been expected, will extend Lucent's reach into a market that is estimated to be growing at more than 60 per cent a year. Chromatis makes equipment that promises to increase the capacity of local metropolitan networks at half the cost of other optical networking gear.

Metropolitan networks represent the next big frontier for investment in optical technology, according to Lucent and Chromatis executives.

Most investment so far has come in "core", or backbone, communications networks, in part because there has not been a cost-effective way to deploy the technology in local facilities. Chromatis's main product, called Metropolis, has yet to generate any revenues.

However, Bob Barron, chief executive, predicted it would produce sales of "several hundred million dollars" next year.

In a comment issued before the deal was confirmed, Michael Ching, an analyst at Merrill Lynch, called the expected price tag "a bit pricey for a company that currently does not have revenues". He added, though, that the price per employee was in line with other recent optical networking acquisitions.

The deal is by far the biggest acquisition of a company rooted in Israel, valued at nearly three times Intel's purchase of DSP Communications, an Israeli manufacturer of chips for cellular phones, for Dollars 1.6bn in cash last year.

It coincides with an explosion of incoming funds to Israel's venture capital industry, which played a key role in securing Dollars 50m in international private equity financing for Chromatis.

Chromatis employs 100 of its 160 workers in Tel Aviv. Among its founders are two Israelis, Rafi Gidron and Orni Petruschka, co-chairmen of the company.

Previously, the two had founded Scorpio Communications, an equipment manufacturer sold to US Robotics in 1996 for Dollars 72m.