ADVA Optical Networking's acquisition of Movaz Networks is the latest example of the ongoing consolidation across the telecoms optical supply chain. It gives ADVA a portfolio of reconfigurable optical add–drop multiplexing (ROADM) products – a smart move when ROADM annual revenues are expected to reach almost $300 m by 2011, according to industry analyst CIR.
Market research firm Ovum-RHK considers consolidation of this type to be inevitable in order to align supply with demand and stabilize prices. "The metro WDM market remains oversupplied and this is slowly being sorted out," comments Mark Lum, an independent analyst and consultant. "ADVA–Movaz is a much smaller deal [than the Alcatel–Lucent merger] but in metro WDM it is no less important."
Analysts consider the purchase to be a savvy move. As well as picking up the US systems vendor's ROADM technology, ADVA has gained a strong North America market presence, lacking until now. And it is getting them on the cheap: ADVA is paying $6 m in cash plus 6.5 million of its shares, valued at some $71 m. Movaz's 2005 revenues alone were $56 m.
Ovum-RHK cites two reasons for the low purchase price. Movaz's business is broad rather than deep – with a customer base of 64 carriers and 26 enterprises and an average yield of less than $1 m per customer. It is also not certain what the Alcatel–Lucent merger will mean for Movaz, which co-developed Lucent's wavelength services manager (WSM) ROADM platform.
Bijan Khosravi, Movaz's chairman and chief executive officer, says that the company had considered an IPO but it changed tack following Cisco's acquisition of Scientific-Atlanta, the Lucent–Alcatel merger, and AT&T's merger with SBC and planned merger with Bell South. "We decided that we had to be part of a more global presence," he explains. "ADVA was the right move for us."
ADVA is the leading metro WDM vendor in EMEA but doesn't even make the top five in the North American market, says Ovum-RHK. The acquisition will boost ADVA to third place in North America and second globally, with joint revenues of $210 m.
Market matters
Movaz's success has been in supplying its RAYexpress OADM – and more recently its ROADM platforms – to the government, cable MSO, and research and education markets. "In research and education Movaz has done an excellent job and parallels what we have done with [the] storage [area network market]," explains Brian McCann, ADVA's chief marketing and strategy officer. "We will continue to invest in these market verticals and, by expanding sales, business management and added features, achieve even more in these markets."
McCann believes that their relationships with existing partners will continue. ADVA and Movaz have focused on the vertical markets, leaving the traditional North American carrier market to its partners Fujitsu and Lucent, respectively. "If carriers require SONET, switching, optical transport and Ethernet switches – a total solution with software integration and a single point of contact, we will leave it to our partners," says McCann. Meanwhile, the newly combined company will focus on ADVA-driven contracts.
However, Jason Marcheck, principal analyst, optical infrastructure at Current Analysis, believes that changes in the partnerships are inevitable. Movaz recently announced a deal that would allow it to take advantage of Lucent's supply chain. "It's now not clear where that stands," Marcheck explains. In turn, Lucent has recently launched its Universal Packet Mux platform, which uses a ROADM that is not Movaz's.
Another consequence of the deal is product overlap, which is unavoidable given that Movaz and ADVA both focus on metro WDM. ADVA's FSP 3000 and Movaz's RayROADM and RayExpress address similar applications. But ADVA only detailed its ROADM plans in March 2006 and has yet to launch a product – now it can use Movaz's ROADM portfolio. "Movaz has struggled to make products that really sing in the market," adds Lum. "That is what ADVA is good at, making products that carriers and enterprises want to buy."
McCann dismisses the claim that ADVA is late to market with a ROADM product. "There are still limited deployments on a large scale," he explains. "That said, the market is maturing; it is not just AT&T and Verizon." Khosravi agrees: "A year ago, 20% of metro regional and access RFPs [request for proposals] required ROADMs, now it is almost every customer RFP."
"It is early days for ROADMs in the metro," admits Marcheck. "But a lot of carriers are already evaluating systems [which ADVA has not had]. Acquiring Movaz means that ADVA can step around that." In Europe there is less demand for ROADMs, but Khosravi claims that interest is growing.
Movaz benefits from ADVA's Ethernet and service interface offerings. "We can offer them [to customers] immediately," says Khosravi. The merger will also expand the companies' R&D resources with the first joint development work marketed in early 2007.
While other ROADM vendors have combined electrical switching and an optical ROADM in one platform, ADVA questions this approach. "We are doing today aggregation with add–drop multiplexing, so at some level we are collapsing [systems]," explains McCann. "But we are not going to bring everything down to one platform." With ADVA's partnership with Fujitsu and Siemens, and Movaz's with Lucent, there are enough platforms to serve the requirements of all customers, he says.
McCann says that ADVA will retain most of Movaz's 150 US-based staff. "Among the acquisitions this is a more positive one," adds Lum. "It is not about job cuts."