In a way, Zhone
In the Zhone deal, the private equity firms teamed up with CS First Boston and New Enterprise Associates, a venture capital firm, to pony up $500 million for Zhone. Interestingly enough, Zhone was a start-up, but one with a sterling list of executives. The business plan called for rolling up the lucrative telecom equipment marketplace.
Well, these investors actually entered the twilight Zhone. Of course, it was the top of a frothy market.
Despite the telecom meltdown, Zhone did not abandon its mission as an acquisition vehicle. In 2003, the company did a reverse merger, allowing it to become a public company-and make even more deals.
Zhone's latest deal is the purchase of Paradyne Networks Inc.
Unfortunately, Zhone's stock performance was much different--it plunged almost 19%. Then again, the conference call was somewhat vague. It sounded like the typical stuff of a muddled deal: cost savings (probably in the form of headcount reductions), expanded customer base, more product offerings, and an improved balance sheet.
Why an improved balance sheet? Well, Zhone has negative cash flows. As for Paradyne, it has $42.2 million in cash. This is an easy way for Zhone to feed the beast.
But investors should be wary of Zhone's optimism on the deal. Keep in mind that the company has spent $850 million on 12 acquisitions over the past six years. Still, the company generated a mere $27.6 million in revenues last quarter, and the net loss was $5.1 million.
Be that as it may, there is a bright spot. Upon announcement of the deal, Zhone also indicated that it will have slightly better results for the second quarter. This is also the case with Paradyne. What's more, it appears that there may be a pickup in telecom purchases, as the carriers have put off spending for awhile.
And there are also new investments in things like VOIP. But in the world of telecom equipment providers--with large companies like Nortel