Good Times (Almost) Back in Telecom

The big AT&T-BellSouth merger, the deal between Lucent and Alcatel, the big spending on fiber and wireless networks — the good vibes, if not good times are back in the telecom land. Even the smaller players are getting into the swing of things, and starting to buyout those down the food-chain.
PMC Sierra, a chip maker long forgotten by the Wall Street, decided to buy Passave, maker of passive optical networking components for $300 million, betting that it would get a piece of the fiber broadband action. Given Passave did about $43 million in sales last year, Paul Kedrosky estimates that’s seven times trailing revenues. Enough to get telecom venture investors hallucinating a tad. (More on that later in the post 😉 )

PON is a rapidly growing market, according to Infonetics Research, which estimates that after more than doubling between 2004 and 2005, the number of worldwide PON subscribers is expected to continue surging, from 3.4 million in 2005 to 31 million in 2009. “Video, IPTV, and other high bandwidth applications are driving demand for PON and Ethernet FTTH equipment all over the world,” said Jeff Heynen, analyst at Infonetics Research.
NyQuist Capital’s Andrew Schmitt had predicted that the Canadian chip company would make such a move. He gives the deal thumbs up. Why? Because he believes that as PON proliferates, especially in the Verizon’s networks, the phone company would need some sort of VoIP capabilities, and since PMC has a good VoIP portfolio, the two products would come together nicely.

If we see 30MM GE-PON (E-PON = Ethernet Passive Optical Network) nodes deployed by 2010, and Passave/PMC-Sierra secures 50% market share, you are looking at a total revenue stream of $300M…..It is pretty obvious that Broadlight and Teknovus are the next acquisition targets. I’m still thinking Broadcom (BRCM) will buy one or both. Teknovus investors must be throwing a party based on the $300M Passave valuation.

Network operators are also spending big bucks and making a transition to Ethernet-based networks . This is giving investors some confidence in the sector’s start-ups. Today, for instance, Ottawa-based ethernet chip company, Galazar, raised about $6.6 million in venture funding from the likes of BDC Venture Capital and new investor, Mitsui and Company. The company has raised a total of $28.5 million in VC funding thus far.
Closer to home, Atrica, a company that was spun out of 3Com has raised another $28.2 million from new investors Vesbridge Partners and GunnAllen Venture Partners. Also participating in this round – new investor, AT&T Corp. (Is there a contract in the offering as well?) The company had raised nearly $117 million in funding prior to this round, but that was back in July 2003. Atrica’s Ethernet products are getting a lot of traction in emerging telecom markets such as India.
If you remember, earlier this year a bit of a cat fight broke out between Ericsson and Lucent over the remains of bankrupt equipment maker, Riverstone Networks, another Carrier Ethernet player. Lucent eventually won, but then sold itself to Alcatel.