Pseudo-wire: Future applications could lead to consolidation in the backhaul -analysis30 January 2007

Pseudo-wire, a viable technology that is occasionally maligned because of its transitional applications, is seeing growth and consolidation as its applications become more defined.
Originally developed as a bridge between old line phone lines and IP, many say the market hasn't completely materialized, but with a growing demand for voice and storage on the internet, start-ups that specialize in pseudo-wire are likely to see interest from larger players. Some likely targets in the industry include Wintegra, Mangrove, Axerra, and Overture, according to industry sources.
Liviu Pinchas, Director of Technical marketing at privately held Austin, Texas based Wintegra said that he has seen a lot of consolidation in the industry, especially among smaller start-ups. “Last year we saw a lot of demand for our product, and in terms of consolidation, there is a need in the industry for what we do.”
When asked if Wintegra would consider a sale, Pinchas said, “None of our direct competitors do exactly what we do. Zarlink in Canada is one of our main competitors, and Agere [the listed Pennsylvania-based Company which was acquired by LSI Logic] is a competitor for the ATM and internet pseudo-wire.” He added, “I know that they [Agere] have a plan to offer more services.” Interestingly, Wintegra withdrew its IPO in June of 2006.
Another sector giant, privately held Wallingford, Connecticut-based Mangrove Systems, previously struggled because of slower-than-expected market growth in the early part of the decade. CEO Jonathan Reeves said he is currently seeking financing or a strategic combination.
When asked if his company was interested in a strategic combination, Reeves said, “Absolutely…that’s what we are looking for, and the other option is of course, larger finance firms that can develop the company to next level.”
He added that strategic partners or investors are often necessary so that smaller independent company’s technology like Mangrove can see the light of day.
An analyst said Mangrove Systems could be targeted by listed, Massachusetts-based Sycamore Networks. The analyst said Mangrove chairman Jonathan Reeves had previously sold two of his companies to current Sycamore chairman Desh Deshpande. Reeves’ Sahara Networks was sold to Cascade Communications in 1997 for USD 212m. Later, his Sirocco Systems was bought out by Sycamore Networks in 2000 for USD 2.9bn. Deshpande was with Cascade and Sycamore for both transactions.
Another company, Canada-based Meriton Networks, maintains that companies in pseudo-wire production will need to broaden their spectrum of coverage in the coming year. Ken Davison, Vice President of Marketing and Business Development for Meriton, said that alternative technologies are now being applied to pseudo-wire in the wider market.
“I think if you [as a company] were just doing pseudo-wire, you’d really have a problem with where your long term viability was coming from,” Davison said. “The current market is adapting Ethernet services, and the view is that you can use Ethernet in the access network much more cost effectively than you can extend pseudo-wire. This is going to be a big, big debate because pseudo-wire’s place in the market is not as big as it used to be.”
He added, “We [the pseudo-wire industry] are moving from hype to deployment, and now we understand the real issues. Pseudo-wire isn’t the only thing on the table, and smaller companies [that only do pseudo-wire] will probably be looking at consolidation. The winners in this industry will be the ones that act as a gateway applying pseudo-wire in the mobile sector. In the next few years, this technology will move towards an optical infostructure.”
According to earlier reports, both Overture Networks, the private, North Carolina-based provider of Ethernet, voice and video services, and Axerra Networks, the Israeli privately held telecoms hardware manufacturer are likely acquisition targets for 2007.
Overture Networks CEO Jeff Reedy said that 2007 could be the year of pseudo-wire and that larger companies are likely to start sniff around. COO of Axerra Networks, Gil Biran said that Axerra could begin generating buyer interest next year when annual revenue approaches USD 20m.

by Kathryn Tuggle, Kevin Nafziger and Richard Tekneci

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