Sonus to buy Network Equipment Technologies for $42M
SIP communications company Sonus Networks Inc. (Nasdaq: SONS) on Tuesday announced it will buy rival Network Equipment Technologies Inc. (Nasdaq: NWK), in a $41.3 million move toward expanding in the generally profitable enterprise communications space.
The proposed all-cash agreement, specifically, marks a strategic move by Sonus to expand into the enterprise-class networking solutions market.
The intended cash merger, additionally, brings Sonus into the government sales segment.
NET, which counts as customers the U.S. Department of Defense (DoD), the military branches, NASA and the British Ministry of Defense, generated half of its total revenues last year from sales to government agencies.
NET's sales to U.S. and foreign governments "presents a new vertical market opportunity for Sonus," the company's chief executive, Raymond Dolan, said on a conference call.
Moreover, acquiring NET "accelerates" the company's strategic plan to offer customers an end-to-end portfolio of EC solutions.
Sonus said its SBC portfolio with NET's network appliance portfolio is expected to provide enterprises with "a seamless mediation platform that extends from the core to the edge of their network."
With eyes fixed ahead on expansion into the enterprise communications arena, Westford, Mass.-based Sonus shifted some of its attention from the service provider VoIP market to greater focus on unified communications (UC) systems that connect telephony, instant messaging, email and other tools securely across IP networks.
Voice and data unified communications services and applications are particularly sought by companies seeking to reduce their firm's traditional telecommunications costs through VoIP and trunk consolidation, among other technologies.
Sonus and NET said in the deal announcement they would jointly address growing demand for session border controllers (SBCs), which enable SIP trunking and SIP-based UC applications.
Market research suggests favorable conditions for the EC sector.
Infonetics Research reported in April that the market for enterprise SBCs is expected to grow 26 percent, year-over-year, through 2016. That growth will be driven significantly by widespread adoption of SIP trunking, said Diane Myers, Infonetics' directing analyst for VoIP and IMS research.
"The enterprise SBC market is a sweet spot in the enterprise market because they fill a growing need for security, interoperability, and network border traversal," Myers wrote.
The Sonus-NET merger is expected to close in the third quarter of 2012, provided NET shareholders approve the deal and federal antitrust authorities don't object.
On May 9, NET reported its financials for its fiscal year ended March 30. The company reported a net loss for the full fiscal year of $34.1 million, or $1.12 per share, compared to net loss of $26.3 million, or $0.88 per share, in fiscal 2011.
Despite NET's declining revenues and otherwise lackluster earnings, Sonus said it would buy the company for $41.3 million, or $1.35 per share. That is a 14.4 percent premium over Monday's closing share price, Investor's Business Daily reported.
"While Sonus isn't paying a significant premium for NET, the valuation seems relatively rich given that NET has been burning cash and revenue has been declining," Jefferies & Co. wireline analyst James Kisner wrote in a report.
Possibly adding to NET's attractiveness as a potential acquisition is the "strategic partnership" it holds with Microsoft Corp. (Nasdaq: MSFT), Joanna Makris, executive director of U.S. equity research at Mizuho Securities USA, wrote in a report.
A merger, she said, would likely intensify competition in the VoIP infrastructure space, particularly between Sonus and rival networking hardware company Acme Packet (Nasdaq: APKT).
The merger could pose "a significant potential competitive threat" to Acme Packet's position in the enterprise market," Makris said. "With competition intensifying, we think Acme must move quickly and aggressively to define new growth opportunities," Makris was quoted by IBD as writing in the report.
Acme Packet, based in Bedford, Mass., manufactures and markets network equipment, including SBCs. The company's session delivery network solutions enable trusted delivery of voice and data unified communications.
As a result of its NET acquisition, Sonus said it expects incremental revenue of about $15 million to $20 million in the second half of fiscal year 2012, In April, Sonus reported a Q1 net loss of $6.4 million, or $0.02 per share.
Revenue for the quarter declined to $64.3 million, from $67.3 million a year ago. At the time, for the full year 2012, Sonus said it expects a per-share loss of $0.01 to $0.02 on revenues of $270 million to $280 million.
Noted telecom industry researcher Alan Weissberger today offered some historical context for NET's current valuation, in a post on The Viodi View.
NET was a rising industry star during the late 1980s. In August 1983, it closed its first round of venture capital funding, and just four years later it was leading the T1 multiplexer market.
In January 1985, the company began shipping for revenue its Integrated Digital Network Exchange (IDNX) T-1 multiplexer.
"Success came fast," Weissberger recounted. NET became profitable in April 1986, with revenues of $6.7 million for the quarter ending June 1986. Amid the young company meteoric success, it went public in January 1987, with a post money valuation of nearly $200 million.
For the fiscal year ending March 1987, NET's sales were $47.4 million, representing a growth rate of 450 percent. Profits totaled $5.1 million, Weissberger wrote inThe Viodi View.
Those were the company's best days, undoubtedly. Fast forward to June 2012. Although the company has "survived and remained a viable independent network equipment vendor for all these years," it is worth a mere 20 percent of its January 1987 IPO price, and that is not taking into account inflation.
Weissberger's take on the $41.3 million price for the venerable Network Equipment Technologies: "We suspect Sonus is getting their money's worth!"
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