The End of Tellabs

Today's Blog is different than the other's I have posted. I am going to talk about the pending sale of Tellabs to a Private Equity Firm for $891M. Given that the revenue of Tellabs should be about that this year the sale is about 1x revenue. On top of that, Tellabs has over $500M in cash. That means that the sale is between 1/3 and 1/2 of current revenue. Not a great price.

Light Reading has full coverage of this and there was a bit of speculation about whether there might be a counter-bid. Tellabs has publicly said that it has talked to over 30 companies so it seems that there will be none.

My time at Tellabs was a mixed bag. I had a great experience while I was at AFC, but Tellabs was nowhere near as rewarding. There were some great people I met, but I thought many of the plans that were set forth made no sense and I said so.  That made me unpopular on a regular basis.

But I thought what I would post about, was how AFC ended up getting an offer from Tellabs. I don't recall the exact date, but it must have been in late Q1 or early Q2 of 2001. I know we had already found that Winstar was going bankrupt and that Tellabs was cancelling all their orders associated with Cablespan. AFC would be okay, but we had just lost about $80M in annual revenue from those two sources. John Schofield and I were in Keith Pratt's office. The telecom world was coming apart around us. Keith was refering to Telecom as a "Toxic Wasteland". People were very happy that we had hedged our Cisco position at $65 a share at that point. Earlier they had been blasting us for it.

The three of us sat around and pondered the future for most of the afternoon. We reached a consensus that our customers would consolidate and that would cause a consolidation in the Telecom Equipment market. We came to the conclusion that AFC was too small to play in a world dominated by major vendors. The conclusion was simple. We needed AFC to grow very quickly or sell it. From that point forward, that was our mission.

I created a list of 7 companies that were potential buyers of AFC. We excluded the Chinese and Japanese from our list. The Chinese would likely be a challenge politically and the Japanese seemed unlikely to purchase a firm of AFC's size. From there, we sent John on a road show to meet the 7 CEOs and see what the possibilities were. The answer was clear: "AFC is a very nice little firm, but we only care about Tier 1 revenue and you have very little of that." So, our strategy became clear. We had to convert AFC to a Tier 1 revenue firm.

We ran a strategic planning process later that year with the idea of getting the rest of the Executive Staff on board with that plan. In retrospective, this plan succeeded wildly. When Tellabs bought AFC in 2004, we had gone from 20% to 65% Tier 1 revenue. Later that percentage went even higher.

When the FiOS win and the Marconi Access purchase became public, things got hot on the M&A front. In the end, we had only 3 companies actually take any kind of look at AFC. Siemens dropped out early as they ran into the scandal that had many executives arrested. Cisco took a purchase to their Board, but I suspect that is when they decided that Scientific Atlanta would be a better deal for them. Tellabs made and offer and most of the rest of that story is very public.

We had anticipated that an AFC/Tellabs combination was too small and the company would have to either buy more or be bought. I understand the plan that Krish had in place was a sale to Ericsson. My understanding is that Mike Birck thought the price was too low. Too bad, the combination would have been right for Tellabs. And here it is now.

Jim Sackman - former CTO of Advanced Fibre Communications
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