June 11, 2004 1:36 PM PDT
Hyped start-up Procket for sale
A deal is expected to be announced as early as next week, but the buyer is still unknown, two sources close to Procket staffers said. The sources confirmed that both Cisco Systems and Foundry Networks have emerged as potential acquirers. The price tag for the deal is likely in the range of $80 million to $200 million, the sources said, well below the staggering $300 million in venture capital funding Procket had attracted over the years.
Representatives of Procket and Cisco declined to comment for this story. Foundry did not return calls by press time.
Procket, which makes high-end routers for shunting traffic across the Internet, epitomizes the overexuberant investment climate of the late 1990s. Founded in 1999 at the height of the telecommunications spending frenzy, the company was expected to become the next big challenger to Cisco and Juniper Networks in the core Internet Protocol routing market. Together, Cisco and Juniper make up more than 90 percent of the market. But after five years on the scene, Procket has failed to live up to expectations.
The endgame for Procket comes after a steep slide from its position as one of the most highly valued VC-backed companies in the United States, worth $1.55 billion in 2002, according to researcher Thomson Venture Economics.
Procket built its reputation on its dream team of founders: Sharad Mehrotra, William Lynch and Tony Li. Mehrotra and Lynch, both formerly of Sun Microsystems, led development of the company's programmable, custom-built microprocessors. Tony Li, best known for helping Cisco and Juniper develop IP routing code for their flagship products, handled Internet and routing technology development.
Since introducing its products more than a year ago, Procket has only a handful of customers, mostly including universities and small carriers. Its most prominent customer is NTT in Japan, which also uses Cisco and Juniper gear. It has yet to announce a major deal in the North American market.
The company has also gone through a series of management shake-ups. Last summer, Randall Kruep, the former CEO, left the company. Then Vito Palermo, the COO, left in January. Most recently, the company lost Li, who is viewed as a guru in the routing software industry.
While telecommunications spending seems to be making a comeback--especially on IP gear--carriers are more reluctant than ever to buy equipment from companies they view as financially unstable. For start-ups such as Procket, this has made winning major deals even more difficult.
Even Cisco and Juniper are using partnerships with large telecommunications equipment makers to win large carrier accounts. Cisco recently announced a deal with Ericsson. Juniper has reseller and development contracts with Lucent Technologies, Siemens and Ericsson, among others.
So why would Foundry and Cisco be interested in Procket?
Foundry, which makes high-end Ethernet switches, and Procket share a common customer, NTT. Several analysts have pinned Foundry's revenue shortfall in the first quarter of 2004 to reduced sales in Japan, sales that fell from 18 percent of Foundry's total revenue in the third quarter of 2003 to 10 percent in the first quarter of 2004.
Analysts believe that Foundry could win additional business with NTT if it had more routing in its portfolio. The combination could be a win-win for the two companies. Foundry could offer a wider array of products, and Procket could become part of a more stable public company.
"If I were to speculate, there is a common tie between Procket and Foundry with respect to NTT," said Erik Suppiger, an analyst at Pacific Growth Equities. "NTT is a very strategic customer for Foundry. And NTT is really Procket's only large carrier customer."
The rationale behind Cisco buying Procket seems a bit more difficult to justify. Cisco has just spent four years and $500 million building its next-generation router, the CRS-1. The product competes directly with Procket's core IP router.
"Cisco is a less obvious candidate, since Procket's routers appear to overlap with Cisco's just released high-end router," Suppiger said. "It doesn't seem consistent with Cisco's acquisition strategy."
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