Lucent Technologies (NYSE: LU) today said it will acquire Chromatis Networks, a leader in metro optical networking systems, which is the fastest-growing segment of the optical networking market. Chromatis recently announced a revolutionary technology that can reduce the cost of building metro optical networks by one-half while radically improving their performance.
Lucent will acquire Chromatis, a privately held company, in a stock transaction for approximately 78 million shares of Lucent common stock, valued at about $4.5 billion, based on the closing price of $58.19 for Lucent stock on May 30, 2000. This excludes the approximate 7 percent stake in Chromatis that Lucent already owns through its Lucent Venture Partners venture capital subsidiary. Certain key employees of Chromatis also could receive an additional 2.5 million shares (valued at approximately $145 million based on the closing price of Lucent stock on May 30, 2000), contingent upon Chromatis meeting certain performance-based goals.
``The acquisition of Chromatis will enable us to bring the bandwidth-expanding power of optical technology directly to our business customers, and gives Lucent a leadership position in the fastest-growing segment of the optical networking market,'' said Richard McGinn, Lucent Technologies chairman and chief executive officer. ``With Chromatis, Lucent is one step closer to bringing the speed and power of fiber optics all the way to a customer's desktop. This acquisition will allow us to enhance what is already recognized by the industry as the broadest portfolio of optical networking products.''
The main shareholders in Chromatis are: Lucent Ventures (7%), employees and entrepreneurs (40%), the Jerusalem Venture Partners venture capital fund (15%), and the Chase Manhattan and Eucalyptus group (5%). Crosspoint and Communication Ventures, which entered at the seed stage, and Soros funds hold the rest.
According to a senior source close to the deal, the entrepreneurs, Rafi Gidron and Orni Petruschka, would have preferred that the company not be sold. They had "mixed feelings about the sale of the company. There was hesitation over whether to build a giant company on the one hand, and whether to become a Lucent employee with an employee's identification card.
"All the investment banks were eager to issue the company at enormous prices exceeding that received in the sale. They felt an obligation to the employees and the investors, because they had already 'done it' by selling Scorpio. They hope the business will be allowed to be managed separately, because the chance of attacking the market and developing are much greater when the spirit of entrepreneurship is preserved", said the source.
Chromatis CEO Bob Barron will contine to work in the company with the company's five managers, including the founders, Gidron and Petruschka. Lucent said it expects to complete the acquisition proceedings on June 30.
In answer to a question from "Globes" whether Lucent International intends to expand Chromatis's activity to an Israel fiber optics development center, Lucent Israel general manager Uri Ben Dori said, "I think that is what will happen. It is very likely."
Pioneer Consulting estimates the worldwide metropolitan optical networking market will have an annual compound growth rate of 61 percent through 2004. Metropolitan networks act as a bridge carrying Internet, data and voice traffic from the larger network ``core'' to commercial office complexes and residential customers living in high-rise buildings. Because these are short-distance networks with a mix of existing and new equipment and service requirements, optical networking has not previously been seen as a cost-effective solution.
Chromatis was recently selected as one of Upside Magazine's top 100 private companies. The selection criteria included technological achievements, customer acceptance of product and services, financial performance and management savvy.
Chromatis' flagship product, the Metropolis system, is the first in the industry to integrate data (packet), voice (circuit) and video services together on metropolitan networks and combine this traffic onto a wave division multiplexing (WDM) system. The WDM system relieves network congestion by providing vast amounts of bandwidth in the form of multiple optical wavelengths that blast traffic through the network at the speed of light.
All Metropolis products feature a revolutionary technology called selective wave division multiplexing (SWDM) which allows network providers to deploy only the optical wavelengths they need -- where and when they need them -- thereby realizing huge savings in WDM start-up costs.
``Chromatis pioneered the integration of WDM with multi-service access for carriers' metro networks and has emerged as the recognized leader in this rapidly growing market,'' said Bob Barron, Chromatis chief executive officer. ``Lucent has long been an innovation leader in optical networking and is the worldwide leader in optical WDM systems deployed. The combination of Lucent and Chromatis will provide the industry with next-generation metro optical networks that meet the cost and capacity requirements for both traditional service providers as well as the very different requirements of the new broadband Internet service providers.''
The acquisition, including the performance-related contingent payments, is expected to dilute Lucent's pro forma earnings per share for ongoing Lucent operations(a) by about two cents in fiscal 2000 and approximately five cents in fiscal 2001.
Chromatis has its headquarters in Herndon, Virginia, and has a research facility near Tel Aviv, Israel. In March, Chromatis announced a five-year agreement with Cogent Communications, an Internet service provider that serves large office buildings in twelve major U.S. markets. Chromatis also has a number of trials with several Local Exchange Carriers (LECs), and Interexchange Carriers (IXCs) including Qwest.
Metropolis joins a portfolio of optical networking products Lucent offers for metropolitan networks, including WaveStar AllMetro OLS, which brings optical networking to wider, regional networks (like those connecting cities), and WaveStar AllSpectra OLS, which brings optical networking capacity to enterprise networks.
Published by Israel's Business Arena on May 31, 2000.