Four years ago, P-Cube president and CEO Yuval Shahar told "Globes" that he would not sell the start-up he cofounded with Dr. Giora Yaron and Benny Schnaider to Cisco Systems (Nasdaq:CSCO). But a $200 million offer caused him to change his mind this week. Under the agreement, Cisco will pay P-Cube's shareholders in cash and shares for the company. The deal, which is contingent upon several conditions, will probably be completed during the current quarter, Cisco's first fiscal quarter for 2005.
P-Cube is Cisco's eighth acquisition of an Israeli company in the past six years. With the acquisition of P-Cube, Cisco will have spent $943 million on Israeli acquisitions. The previous acquisition was Haifa-based Actona Technologies for $100 million in cash two months ago.
Yaron, a former president of Indigo NV (now HP-Indigo), general manager of National Semiconductors Israel and chairman of Comsys, and his colleagues Shahar and Schnaider have already sold one company to Cisco: Pentacom, sold in April 2000 for $118 million.
Cisco hopes that acquiring P-Cube will enable it to supply IP service providers with added monitoring and management capabilities, such as VoIP, interactive games, video-on-demand and peer-to-peer communications.
Shahar said Cisco's acquisition of P-Cube had not been on its agenda. "Cisco approached us several months ago, after learning about our business from customers. It studied the market and technology, after which it was an easy step to build a business model. Cisco was the only company to contact us, and we approached no one else."
Shahr said P-Cube's original plan was to hold an IPO, which he and his partners planned to make in 18-24 months. "I hoped that the markets wouldn’t be in the stratosphere then," he said, explaining why P-Cube decided not to wait for an IPO.
"Globes": P-Cube return on investment probably wasn’t what your investors had hoped for.
Shahar: "Everyone is pleased by the deal. Investors are getting a small profit and the founders are also getting something. We started out during the bubble era. Although some companies received illogical valuations, few survived the bubble to reach an exit. Pre-bubble expectations were very nice, especially companies that had exits before it burst, but everyone subsequently shrank back to more normal dimensions. Cisco shrank from a $500 billion market cap to $150 billion. The sale of P-Cube in today's market is a great success, and it will be a greater one if the market improves and employees benefit."
There was talk of a large financing round while you were negotiating with Cisco.
"We were building a company, not selling one. We didn’t really need the proceeds from a financing round, but strategic investors wanted to come in and expand cooperation. We considered raising money, but then Cisco made an offer, rendering a financing round irrelevant."
What are your sales?
"I cannot disclose numbers, but obviously a young company with 120 employees is nowhere near break-even. We had enough cash to reach profitability even without holding the planned financing round."
How much does your solution cost customers?
"We sell our box for $50,000, and some customers buys scores of them. Large customers sometimes also ask for additional services. For instance, an Italian customer wanted to handle customers in a different way, and sought a solution that would enable him to know where his customers' devices were entering the net."
How many customers do you have now?
"Over 50. We haven’t announced many customers, but Cisco knows about them." ,I>(P-Cube has mentioned Japan's @nethome and NTT DoCoMo (NYSE:DCM; LSE:NDCM; TSE:9437), Korea Telecom (NYSE:KTC; KSE:30200), BellSouth (NYSE:BLS), NetVision and other customers on its website, O.L.).
Who are your main competitors?
"All kinds of companies claim to be part of the sector. Our main competitor is Ellacoya Networks, followed by Allot Communications of Israel. The difference is that our competitors built software-based products, while our solution mainly uses specialized hardware. We have 20 patents and we've developed a lot of software. We're the leader in terms of customers.
"We'll be a business unit within Cisco, and it's pinning a lot of hopes on us. I'll continue to manage the company and we're committed to getting the business off the ground. We've been given a platform that will expedite our vision. Cisco is the company that laid the connectivity infrastructure for the Internet. As far as we're concerned, it will be a lot easier to piggyback on the company that laid the infrastructure."
You once said you wouldn’t sell P-Cube to Cisco.
"I was misquoted. I said that the founders and I planned to build a company, and that people who build companies for sale won't get far. We built a company in order to build a company."
Analysis and Synergy
Cisco business development manager Israel and Europe Yoav Samet is responsible for locating and examining acquisition opportunities. He said P-Cube combined market analysis, verification and synergy with Cisco's platforms. He declined to provide business forecasts for P-Cube, saying that P-Cube's technology complemented Cisco's router platform, and that Cisco had plans to work with P-Cube to install its architecture.
You completed the acquisition of Actona only two months ago. What's the next company in your sights?
Samet: "I cannot comment about our future plans. We're always looking for acquisition opportunities in Israel."
Why P-Cube?
"Service providers are planning to develop a new segment in the IP services command and control sector. This is the next phase in IP network evolution. Service providers worldwide are at a crossroads. There are millions of subscribers linked to hundreds of providers.
"Service providers understand that they must advance from the phase of only recruiting subscribers to the phase in which they must keep them and induce them to buy more services, thereby increasing the providers' average revenue per user (ARPU) and increase profits. To do this, service providers must find services that subscribers will use, rank and price them."
Do you have sole responsibility for examining companies?
"Cisco has quite a large business development team that is involved in deals. Company acquisition analysis is very precise. Ultimately, customer success and shareholders' profit are very important for Cisco."
What will happen to P-Cube's employees?
"Cisco Israel will have 500 employees following the acquisition. P-Cube's development staff will be integrated into Cisco Israel, while its administrative staff in the US will be integrated with Cisco's San Jose headquarters."
How has Cisco's recent laying off sales managers affected the activities of its development center in Israel?
"90% of Cisco Israel's employees are development staff. The rest work in finance, personnel and sales. These are separate units, each of which reports to a different unit in Cisco. There is little exposure or interaction between the development and sales staffs in Israel, except for a forum of Israeli unit chiefs that meets from time to time."
Evergreen and Ascend make a small profit
P-Cube is Evergreen Partners' third exit in twelve months, following Actona and Envara. Evergreen accompanied P-Cube from the outset, making its first investment in the company in 1998, and participating in its subsequent financing rounds. Ascend Technology Ventures made its first investment in P-Cube's third financing round in 2002.
Sources close to the P-Cube deal say Evergreen will make a $7-8 million profit on the exit. Evergreen Partners partner Boaz Dinte declined to name a figure, saying, "It was agreed that the details of the deal would remain confidential, so I cannot comment about numbers."
Dinte said Evergreen was quite pleased by the deal. "We accompanied P-Cube from the beginning. Our $37 million Periscope fund, raised in 1997, invested in the company. We participated in all of P-Cube's financing rounds, some of which were large, and even increased our stake in the company over the years, even though we led none of the rounds."
Was P-Cube a typical investment for Ascend?
Ascend Technology Ventures general partner Moshe Bar-Niv: "It's true that we normally invest in seed or first rounds. Very rarely, when there is a worthwhile investment in a later round and there are promising parameters, we'll make exceptions. P-Cube met all these parameters: management, excellent technology and a superb team. We invested when the company was in trouble, but we saw the opportunity, and it's now clear that we were right."
Wouldn’t it have been better to hold onto the company for a little longer and reach a larger exit?
"We believe you should keep you feet on the ground while aiming high. On the other hand, you have to know when to make the right decision, and not rely on dreams that may or may not be achievable."
Published by Globes [online] - www.globes.co.il - on August 25, 2004