For Clarent, IPO Buzz Takes On Takeover Overtone

As the company prepares for its initial public offering, many analysts are saying an acquisition of Clarent may be in the works.
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SAN FRANCISCO -- As Clarent gears up for its initial public offering, there seems to be a louder buzz about the networking company as a takeover candidate than as an IPO candidate.

Redwood City, Calif.-based Clarent plans to raise as much as $60 million through an IPO as early as this week. At first glance, the networking start-up seems well positioned: It makes equipment that can run voice and data calls over Internet-protocol phone systems, a market that research firm

Cahners In-Stat

expects to jump from less than $200 million last year to $2.5 billion in 2003.

The problem for Clarent is that

Cisco

(CSCO) - Get Report

and

Lucent

(LU)

are also barging into the market. While late entrants, those two networking giants have an advantage because their equipment can fit snugly with network systems the world over, giving them better access to a wide array of customers.

Given such formidable competition, customers and analysts say an acquisition of Clarent may be a matter of time, most likely by a telecom giant in Europe or Asia that's looking to keep pace with Cisco.

"They could be a complete failure if they go head to head" with Cisco or Lucent, says Hilary Mine, executive vice president with market consultant

Probe Research

. But Clarent executives are smarter than that, she says. Mine expects Clarent to partner with large carriers and eventually get acquired.

Among potential acquirers,

Siemens

,

Alcatel

(ALA)

or

Fujitsu

might find Clarent a great way to close the gap with Cisco in the Internet phone business, says Scott Fogle, a senior vice president at Clarent customer

Rapid Link Telecommunications

.

Fogle's Atlanta-based phone carrier runs about 20% of its long-distance calls over Internet protocol. Fogle intends to test systems from Cisco and Lucent later this year. Those companies sell products worldwide, so Rapid Link might be able to link more tightly with other phone companies, Fogle says.

For now, the IPO indicates that Clarent intends to compete with any potential suitors. The company tentatively intends to pour $30 million of its IPO proceeds into sales and marketing, $11 million into research and development and $8 million into general expenses, according to its prospectus. Clarent officials declined to comment for this story, citing a quiet period required by the

Securities and Exchange Commission

. Cisco and Lucent also declined to comment.

Clarent, while still losing money, is growing its sales rapidly. Its first-quarter revenue rose 180% to $6.7 million from a year earlier. The company's net loss widened to $5.5 million from just $324,000 a year earlier.

The stock will leave the gates highly valued. At its suggested share price of $13 to $15 per share, the offering would value Clarent at $342 million to $395 million, or as much as 21 times its $19 million in revenue for the four most recent quarters. By comparison, Cisco is priced at $192 billion, or 18 times revenue.

Clarent has its own advantages. The company has forged ties with marquee clients such as

AT&T

(T) - Get Report

. In late 1997, AT&T's Japanese division started running Clarent calls. And in April, AT&T agreed to run IP-based voice and fax calls through parts of its internal network.

Clarent also makes calls cheap. Its client Rapid Link, for example, charges 15 cents a minute to call from Germany to the U.S., which according to Rapid Link undercuts many competitors by a nickel or more.

And by some accounts, Clarent actually delivers clean signals -- still a significant hurdle for Internet calling. "You can't tell you're talking on voice over

Internet protocol," says Dan Warmenhoven, CEO of

Network Appliance

(NTAP) - Get Report

, a builder of network-storage systems. Warmenhoven holds an undisclosed stake in Clarent and served as a director of the company until time constraints prompted him to resign from the board one year ago.

While all of those strengths may help Clarent compete against much larger rivals, they may also be the assets that attract the attention of deep-pocketed suitors. And in the end, that may be the best outcome for Clarent.

"I think it would be a sound strategy for them to go public, and 12 to 18 months from now, position themselves to be acquired" with a higher profile and a higher valuation, says analyst Laurie Gooding with Cahners In-Stat.