Yokneam-based

Surf Communications Solutions

is set to complete a $20 million round of financing in January. This should be the company's last private placement before going public. The financing is being led by investment bank

Salomon Smith Barney

, and is expected to close at a post-financing valuation of $80 million, which means a $60 million company valuation for Surf.

Surf CEO Amnon Gavish confirmed that the company is in the process of conducting a private placement led by SSB, but declined to comment on the scope of the financing, although it is known to be higher than previously reported. Nor would he confirm the company's estimated valuation.

Surf was founded as a subsidiary of

Israeli Better On-line Solutions

(Nasdaq:BOSC). At first Surf shared offices with BOS. But as the startup expanded, its ties with BOS have weakened. Before the current round of financing round, BOS held 25% of Surf's stock.

Surf's Yokneam office employs 90 out of the company's 100 employees. The company maintains bureaus in Boston, Oakland and Europe.

The

Polaris Venture Capital

fund also holds some 12% of Surf's stock. Other significant stockholders include the company's founders, Amnon Gavish and Avi Fisher, who also also serves as the company's CTO.

Surf develops software-based access solutions for the copper wire telephone lines used in telecom and datacom switchboards. Its software is used in the underlying layer (layer 1) of a communications network but not in the upper layers, which control the application or direction. The company's software empowers the communication lines enabling them to receive signals, and transmit data packets onwards from the switchboard.

Access services based on the same infrastructure

The advantage of Surf's software is that it lets communications providers offer a wide variety of access services within the same infrastructure. The software facilitates the offer of xDSL, ISDN, VoIP and FoIP services on data networks and other kinds of networks, all on the same platform. Gavish explained that the company began selling in earnest during 1999, and believes that millions of dollars in sales will have been racked up by the end of the year. Market forecasts show the company will finish 2000 with sales of between $6 million and $7 million, and the company is expected to reach $20 million in sales during 2001.

Surf sells its products to carrier companies via OEM agreements made with two different kinds of communication equipment firms. Either systems manufacturers such as

Cisco Systems

(Nasdaq:CSCO),

Nortel

(NYSE:NT) or

Lucent Technologies

(NYSE:LU), which provide complete systems to the carriers, incorporating Surf's technology in them. Gavish admits that one such company is

Dialogic

, a subsidiary of

Intel

(Nasdaq:INTC). He says that the connection between the companies is almost a given, as Intel has owned 12% of Surf since early 1999.

Communication chip companies, which sell designated chips primarily to system firms, also use Surf's software. Here too, the software can be integrated into the chips, giving them greater performance. In this field, Surf's biggest customer is

Texas Instruments

(NYSE:TXN), one of the world's largest communication chip and DSP companies. TI too is a Surf stockowner, and owns 10% of Surf's stock after investing in the company in late 1999.

Negotiations with Galileo collapse

Another important Surf customer from the semiconductor sector is

Galileo Technology

(Nasdaq:GALT. The client-provider relationship and the physical proximity (both are located in the same small town) are apparently the reason that Galileo entered advanced negotiations to try to acquire Surf in a $250 million stock deal.

The deal eventually collapsed, when Galileo CEO Avigdor Willenz, opted for a merger instead with American-based

Marvell Technology Group

(Nasdaq:MRVL), but Galileo remained in close contact with Surf. Incidentally, Surf may have been disappointed by the scrapping of the Galileo deal, but the company must have taken some comfort from the fact that Galileo has since shed 50% of its value, so in current prices the deal would only have been worth $100 million to Sharp.

Gavish declined from commenting on the old Galileo deal, saying only that the company is now headed towards going public. He says the current round of financing should meet the company's needs until its IPO.