Tellabs Eyes Edge Router, Switching Market

Tellabs Tuesday moved to pick up privately-held, San Jose-based
Vivace Networks for $135 million in an effort to beef up its offering with edge routers and
switches.

Vivace has only been around for four years, but Tellabs believes the
acquisition will help it get back to profitability, after the steep falloff
in telecommunications equipment sales in recent years.

Infonetics Research says the market for edge routers and switches will grow
from close to $3 billion this year to around $5 billion in 2005. Edge
routers and switches help direct data traffic over networks to large office
buildings and smaller central offices.

Despite some market prognosticators forecasting there will be a rebound in IT
and telecom spending; Tellabs continues to feel the hurt. The company has
just reported its financial results saying its revenues fell by 40 percent,
and that it will be cutting another 14 percent of its workforce.

The Naperville, Illinois-based company is buying Vivace, an MPLS
(Multi-Protocol Label Switching) edge switchmaker, in order to add its Viva5100
and Viva1050 Multiservice IP Switches to its product line. Tellabs is
already a leading provider of digital cross-connect and transport systems
for telecommunications carriers, which are trying to figure out how to
migrate their customers to packet-based networks.

During difficult times for technology venture capital, Vivace raised over
$118 million in three rounds of venture financing.

Shareholders will have to approve the deal, but if it moves forward, as
expected by sometime in the third quarter, then Tellabs will face the
challenges that come with any merger: combining people, products, training,
services and corporate cultures.

Several telecommunications service providers have said they plan on building
IP/MPLS networks for delivering both new and legacy data services in the
future.

Tellabs stock was trading close to $80 a share in 2000, by mid-2001 shares
had sunk to around $40. On Tuesday, while the stock was up, shares were just
over $7.

On a recent conference call with analysts and reporters, Tellabs Chairman
and CEO Michael Birck said the telecom industry is “not going to just emerge
from this in a short period of time … It’s going to be a slow emergence
from what has been a pretty precipitous fall.”

Tellabs’ first-quarter net loss was $42.9 million, or 10 cents a share,
compared with a profit of $5.3 million, or a penny a share, in the year-ago
quarter. Sales in the quarter, ended March 28, fell to $222.5 million from
$371.5 million in the year-ago quarter.

In another grim sign, J.P. Morgan Securities analyst Ehud Gelblum recently
cut his investment rating on Tellabs to “underweight” from “neutral,” citing
the company’s “significantly lower revenue outlook and cost-cutting measures
that don’t appear to go far enough.”

Tellabs has also said more layoffs could be coming. The company now employs
about 4,700 people, down from 8,900 in April 2001.

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