Tellabs Snaps Up a Start-Up

As expected, the company announces an acquisition, and some say there's more ahead.
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Tellabs

(TLAB)

has broadened with a small acquisition. Experts look for more to come.

Early Wednesday, the telecom supplier said it will buy start-up

Salix Technologies

of Gaithersburg, Md., for $300 million in stock in a deal expected to close early next year. Salix builds a switch that enables young carriers and ISPs to convert traffic between telephone networks and data-based infrastructure. Tellabs already has a similar product for more established carriers, such as local phone companies.

Tellabs "made a good choice" because Salix will help it win business with new carriers, says analyst Christin Flynn with the

Yankee Group

consulting firm. However, "I hadn't expected this, really," because of the overlap between Salix and Tellabs' offerings. Flynn says Tellabs likely will broaden further with continued acquisitions. Her firm declined to disclose its client relationships.

Tellabs was trading down 1 7/8, or 3%, at 63 7/16 at midday.

Editor's Note: The following story was published at 10:32 p.m. EDT Dec. 21.

Expectations Build for Tellabs Acquisition

SAN FRANCISCO -- Expectations of an acquisition by

Tellabs

(TLAB)

have reached a high pitch in the merger-manic business of telecommunications equipment.

Tellabs' rivals are broadening their arsenals by buying other companies. To keep pace, Tellabs must move fast.

Cisco

(CSCO) - Get Report

is snapping up Milan-based

Pirelli's

optical division for $2.2 billion in stock. Last week,

Nortel

(NT)

said it will acquire

Qtera

for $3.3 billion.

Ciena

(CIEN) - Get Report

has zoomed from 30 to 62 in two months as it prepares new optical products for release.

"The battleships are turning into fleets of battleships," says analyst Joe Savage, research vice president with

RHK

, which counts Tellabs as a client. Tellabs "either needs to acquire or be acquired." Tellabs CEO Mike Birck, while characteristically tight-lipped, let slip at an investor meeting last month that he might announce an acquisition by year-end.

Birck, who has run the Lisle, Ill.-based telecom supplier for 25 years, has been

selective about acquisitions. He snapped up

NetCore

in

July for about $540 million after months of consideration.

Tellabs still needs to show how it will upgrade its telephone network systems with fiber-optic and Internet technology, according to five industry and stock analysts. Worries increased last month when long-distance giant

Sprint

(FON)

halted development of an Internet telephone system that was to use Tellabs' bridging equipment -- it was not Tellabs' fault, but it did create another question mark.

For these reasons, Tellabs has lagged the giant

Nasdaq

rally this fall. The stock has slipped and now trades just 3% higher than its Oct. 29 level. Cisco and Nortel have jumped 41% and 60% in the same period, respectively.

"We've always thought that Tellabs was very well positioned technologically," says analyst Steve Byars with

Current Analysis

, which consults Tellabs, Cisco and Nortel. "But what we don't see from them is any kind of singular, unified story for how all these things fit together." Equity analyst Patrick Houghton, with the investment bank

Sutro & Co.

, adds, "There's still a perception out there that they have yesterday's product."

Should Tellabs make a purchase this year, a likely target is

Newbridge Networks

(NN)

. Kanata, Ontario-based Newbridge is a telecom supplier with $1.3 billion in annual sales that has consistently failed to meet Wall Street's expectations. Tellabs might benefit from Newbridge's large network switches, says equity analyst Paul Silverstein with

Robertson Stephens

, which has no underwriting relationship with Tellabs.

Judging by the prices that

Lucent

(LU)

paid for similar technology when it acquired

Ascend

this year, Silverstein speculates that Tellabs could pay between $7 billion and $8 billion, or 38 to 44 a share, for Newbridge. Tuesday, Newbridge finished at 22 7/8. Tellabs declined to comment on merger possibilities. Newbridge did not return a call seeking comment.

But Tellabs, a proven performer, might be unable to convince investors that Newbridge is the right partner. "Given how badly the Street would massacre

Tellabs' stock, I don't think

Tellabs would have the gumption to try," says equity analyst Chandan Sarkar with

Soundview Technology Group

. His firm has no banking ties to the companies discussed.

Tellabs might consider acquiring private companies, says Christin Flynn, an analyst with the

Yankee Group

. Her Boston-based firm consults for Tellabs. She and other analysts interviewed see the value of three potential targets:

Corvis

, the high-profile start-up created by Ciena founder David Huber,

Quantum Bridge Communications

and

Tellium

. None would comment on the possibility of a purchase by Tellabs.

Part of the impatience with Tellabs stems from its reluctance to promote half-cooked plans to the analyst community.

"We're not the kind of company that goes out and hypes up new technology before we have it," says Robert Pullen, Tellabs vice president of marketing and engineering. Meantime, Tellabs can count on the durable performance of its existing offerings. The company is expected to keep increasing revenue more than 30% annually by furnishing local phone companies with reliable network "cross-connects." It reached $594.5 million in the September quarter.

Tellabs has bulked up some already. Its

NetCore

unit, acquired in August, expects to ship high-capacity network routers in early 2000. Tellabs' Pullen says the new

Focus

optical systems have stolen some business from Lucent and Nortel. Tellabs is revamping its cross-connect products to compete with popular new offerings from Ciena.

Even with those moves, an acquisition remains the quickest way for Tellabs to keep pace with its peers. Tellabs "definitely needs to start buying," says Nicholas DeVito, Tellium's marketing director. So far, "what they're trying to do is bolt on some capabilities to old products and convince their customers to wait."

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