$3-Billion Lucent Deal Sign of L.A.’s Strength
Southern California’s emergence as a powerhouse in communications and networking technology was underscored Monday by a proposed $3-billion takeover of an Alhambra company whose value increased 30-fold in less than a year.
The deal by telecommunications giant Lucent Technologies to acquire little-known Ortel Corp. demonstrates the powerful technological advances pushing cable television systems and other networks toward fiber optics so they can carry more channels and offer interactive services such as Internet access and telephone connections.
Some of the key advances, such as those exploited by Ortel, stem from the aerospace and defense buildup of two decades ago, which has placed Southern California at the vanguard of the latest boom in Internet technologies.
Lucent sought Ortel not for its modest financial results but because the small company’s lasers can accelerate transmissions in fiber optic networks.
For that Lucent will pay a steep price. The deal for Ortel, whose stock traded for as little as $6 a share last year, will make several of the company’s founders and executives centi-millionaires.
Jon P. Goodman, executive director of EC2@USC, a business incubator at USC, said that the exorbitant prices paid for these cutting-edge technology companies mark a new phase of the Internet revolution, one that will put a premium on companies with advanced networking expertise.
She said the current phase is driven by “dot-com” companies that do not rely on exceptional high technology, but rather on their ideas on how to put the Internet to use. The next phase will rely on companies that make the equipment that supports the next-generation Internet--one capable of moving content in full video and sound, and at the highest speeds.
“The easy stuff is over,” she said. “Now we’re getting to the hard stuff.”
Goodman said that Southern California is well situated because of its strength in aerospace technology.
“Signal processing, photonics and optical technologies--all these were first deployed in aerospace,” she said. “This is just a continuation of the strength that led our area to preeminence in aerospace.”
The influence of other Southern California companies like chip maker Broadcom Corp. of Irvine, and the cellular phone technology company Qualcomm Inc. of San Diego, show that the region is thriving a decade after its defense-industry slump.
The proposed sale of Ortel is the most recent in a series of large sales of networking-related companies in the Southland, including Thousand Oaks-based Sandpiper Networks, which was sold to Digital Island for about $630 million in December, and Xylan Corp. of Calabasas, which was bought for $2 billion last year by French telecommunications equipment maker Alcatel.
“There are those of us who have always believed that Los Angeles has had dual strengths,” beyond just the entertainment industry, and “that we also had robust strength on the technology side of the [communications] revolution,” said Rohit Shukla, president of the Los Angeles Regional Technology Alliance, a private nonprofit industry group. “This sale is the latest in a string of evidence that the future is going to be phenomenal.”
Ortel shares, which have soared as high as $189.50 recently in part on takeover rumors, fell $9.06 to $168.06 on Nasdaq on Monday after the deal was announced. Lucent shares eased 38 cents to $56.63 on the NYSE.
Under the terms of the agreement, each share of Ortel stock will be converted to 3.135 shares of Lucent stock.
A Sense of Accomplishment
Ortel, founded in 1980 by a small group of former and current CalTech scientists, makes the tiny lasers that power fiber optic networks used for data and cable television networks.
Nadav Bar-Chaim, one of the founders of Ortel and now a senior vice president for strategy and planning, said he would have never imagined 20 years ago that the company would eventually sell for billions. Back then the market for lasers was small and no one knew the Internet would one day become a consumer phenomenon.
“It’s like going into the desert 20 years ago and then coming out into a fertile area that had not been there before,” Bar-Chaim said. “More than the money, there is just a sense of accomplishment. It validates the technology we went into 20 years ago and finally came into fruition in 2000.”
Within Ortel, Bar-Chaim is the largest individual shareholder, with 5.5%, or nearly 672,000 shares and exercisable options as of August--a stake worth about $113 million as of Monday’s close.
Israel Ury, Orel’s chief technology officer, owns about 640,000 shares and exercisable options, worth an estimated $107.6 million, while former president Wim H.J. Selders holds stock worth about $87 million.
Stephen Rizzone, Ortel’s current chief executive, does not own any shares outright, but holds options for 600,000 shares--worth about $101 million if the options become vested as part of the Lucent deal.
Orel was started in 1980 by physics professor Amnon Yariv and two students, Bar-Chaim and Ury, who wanted to make high-performance lasers that could be used by the Defense Dept. and to control satellite base-station antennas at very high frequencies.
Fiber optic networks carry information as pulses of light and move data at rates far higher than copper wires, which carry signals in the form of electricity.
In its last fiscal year, ending April 1999, Ortel had revenue of $72 million and a net loss of $6 million.
Deal Is Called a Good Fit
Ortel puttered along for years until the demand for advanced fiber optic equipment exploded last year, sending the company’s stock shooting up. As recently as November, the stock was still below $50 a share.
Another factor in the phenomenal rise of Orel’s stock was constant rumors of acquisition after the arrival of new management, which trimmed away the company’s wireless business and put new focus on marketing the company’s products.
“For 19 years, Ortel had a culture that was really an extension of CalTech,” said Rizzone, the executive brought in to head the company. “It was largely engineering-oriented with limited marketing or outbound focus.”
Rizzone said the deal between Ortel and Lucent is a good fit. While Ortel has focused on lasers for cable systems, Lucent has concentrated on lasers for telecommunications networks.
Ortel also has nowhere near the manufacturing capabilities of Lucent. “There’s a tremendous amount of synergy possible,” Rizzone said. “We have very little or no overlap.”
Rizzone, who will become the general manager of Lucent’s Ortel division, said there will be no layoffs among Ortel’s 550 employees. The only changes will be its previously planned move of its headquarters and manufacturing plant to Irwindale.
For Lucent, the deal gives almost instant entry into a market where it has barely been able to make a dent.
John Dickson, the chief executive of Lucent’s microelectronics and communications technology division, said that while Lucent could eventually design the cable lasers on its own, the issue was how long it would take.
“Ortel brings Lucent a presence in a market where we have had a small presence in the past,” Dickson said. “This isn’t really a technology issue we’re solving by acquisition, it’s a time issue.”
Solving its time problem has come at a hefty price considering that Ortel could have been bought just a few months ago for a fraction of the current price.
But Dickson defended the purchase price saying that acquisition frenzy in the optical networking market now has driven all prices up.
“The opto-electronic market is very hot now,” he said. “These are such big numbers just because there is so much excitement in this area. The whole opto-electronic market is just exploding. There is massive investment in the explosion and so you see this ramp up in prices.”
Natarajan Subu Subrahmanyan, a telecommunications equipment analyst with Sutro & Co. in Los Angeles, said that the deal seemed to make good sense for both Lucent and Ortel, adding that the price was not out of line with the prices paid for other optical companies.
He said one important factor in the price paid for Ortel was the company’s ownership of 18% of Tellium, another optical networking company.
In addition to Ortel, the region is home to three hot companies making specialty communications chips used in everything from wireless phones and equipment to cable modems and set-top boxes: Broadcom, Conexant Systems Inc. of Newport Beach (formerly Rockwell Semiconductor Systems), and Qualcomm.
Qualcomm, whose stock was the biggest gainer on the S&P; 500 in 1999, makes specialty chips for mobile phone systems and holds key patents to a wireless communications technology that is expected to be widely adopted worldwide.
The company’s stock closed Monday at $133.44, down $4, to give Qualcomm a market value of $94.5 billion, a jump of about 17-fold in a year.
Broadcom, the leading maker of chips for set-top boxes and cable modems, saw its stock jump $28.31 on Monday, to close at $339.31--giving the company a market value of $35.3 billion, up about sevenfold in a year.
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* INVESTMENT FLOW: Venture funding is growing at a record pace in L.A. C1
