M&A Alert - October 27, 2009
Tellabs Agrees to Acquire WiChorus
Transaction Overview
On October 27, 2009, Tellabs (NASDAQ: TLAB) agreed to acquire WiChorus for $165mm in cash.
Target Description
WiChorus is a young provider of network equipment to wireless network operators who are upgrading their core networks from traditional circuit switch technology to IP packet-based technology, commonly referred to as 3G and 4G, respectively. 4G wireless network technology is particularly well suited to support high data intensive services such as video, internet access, VoIP, email, mobile TV, photo sharing and gaming on wireless network connected devices. WiChorus’ flagship product is SmartCore, an IP-based mobile packet network platform for 4G network standards, LTE and WiMAX, with support for existing 3G network integration. WiChorus has 4 customers and 10 product trials underway. Early customers have included WiMax-based wireless service providers, Clearwire and Open Range. The Company also has 34 patents pending and approximately 100 employees. Since inception, the company had received a total of $42.5mm funding from Accel Partners (Peter Wagner), Mayfield Fund (Navin Chaddha), Pinnacle Ventures (Kenneth Pelowski), and Redpoint Ventures (R. Thomas Dyal), Founded in 2005, WiChorus is headquartered in San Jose, California.
Buyer Description
Tellabs is a telecommunication networking products that enable carriers to deliver wireline and wireless voice/data/video services. Tellabs is particularly well known as a backhaul equipment vendor. Tellabs’ customers include 43 of the top 50 global telecom service providers, as well as independent operating companies, MSO/cable TV companies, enterprises and government agencies. Tellabs’ wireless and wireline networks operate in more than 90 countries. WiChorus will be integrated to the newly formed Tellabs IP and Mobile Internet Group. Robert W. Pullen, President and CEO of Tellabs was the key executive sponsor of the transaction. Founded in 1974, Tellabs is headquartered in Naperville, Illinois.
The $165mm purchase price is being funded via existing cash off Tellabs balance sheet. WiChorus’ only recently began generating revenue. Tellabs disclosed WiChorus’ shipments were expected to be $6mm-$8mm in CY 2009 and approximately $25mm in CY 2010 if the company had remained independent. Specifics as to how shipments translate into recognized revenue were not yet determined. The most recent comparable M&A transaction was Cisco’s purchase of Starent earlier this month at 8.5x last twelve months revenue.
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| Equity Value of Consideration | $165mm |
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| Equity Value Multiple: | |
| 2009 Shipment Multiple1 | 20.6x-27.5x |
| 2009 Shipment Multiple1 | 6.5x |
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1) Disclosed during Tellabs’ transaction announcement conference call.
Strategic Rationale
Tellabs is positioning itself to address wireless service provider needs as they upgrade their networks to 4G technology over the next several years. The market size for 4G network equipment serving the core network is expected to be 2.6b by 2013. Tellab’s historical strength in providing backhaul products to wireless carriers, complements WiChorus’ focus on the core network. The promise is the combined offering provides capital efficient and network performance enhancing smart network routing management.
Architect Partners’ Observations
As with the recent acquisition of Starent by Cisco, this acquisition highlights the growing importance of high bandwidth mobile network, driven by the increasing demand of high-data traffic as smartphones and now-being-introduced netbooks are seeing phenomenal growth in data usage. Other key players competing with products serving the IP packet core network include Ericsson, Huawei and Cisco.