After it raised nearly $80 million a month ago, telecommunications equipment company Allot Communications Ltd. (Nasdaq:ALLT; TASE: ALLT) has some $130 million. Armed with this cash, the company has been seeking a suitable candidate for acquisition, to help it to accelerate its growth. Sources inform "Globes" that such a candidate has been found. Allot is currently in advanced talks to buy Israeli company Flash Networks, at a price of $110-120 million. A component of the price may be shares of Allot.
Allot is one of Israel's outstanding technology companies. The company, traded on Nasdaq and the Tel Aviv Stock Exchange at a market cap of $500 million, develops technology that enables Internet service providers and wireless telephony carriers to monitor and manage their bandwidth, using the analysis provided by deep packet inspection (DPI) technology. Wall Street analysts estimate sales of $76 million for the company in 2011.
If it goes ahead, this will be Allot's first substantial acquisition. Last year, it conducted intensive negotiations with several companies, among them Flash Networks itself. The latter is actually more experienced at the M&A process, from the buying side: the developer of software for wireless carrier infrastructures founded in 1996 merged with Adjungo Networks in 2003, and in 2008 with Unipier. According to IVC, Flash Networks has raised $61 million altogether, from the Evergreen, Challenge-Etgar, HarbourVest, Giza, and Concord funds.
The stories of Flash Networks and of Allot meet at the present time over the load with which wireless networks contend. Each company comes to this problem from a different direction. Flash Networks targets the telecommunications market, with solutions designed for wireless carriers for network load management and improving the user experience. Allot discovered two years ago that technology with which it attempted to penetrate the ISP market actually met the requirements of wireless carriers, which were drowning under the demand for bandwidth from smartphone and portable computer users.
Allot may in the end find other candidates for acquisition in Israel that operate in the wireless market, or companies that enable ISPs to ease the load on their networks. Among other companies, Allot has held talks in the past year with Mobixell Networks, and possibly also with PeerApp, with which it collaborates. For all its healthy cash balance, as far as is known, Allot does not intend to acquire one of its competitors, such as Sandvine, despite their currently attractive prices.
The DPI market in which Allot is active was estimated to be worth $350 million last year by research company Infonetics, with growth of 50% expected in 2011. Allot is ranked third in this market, behind Sandvine and Cisco. The wireless services provider market now accounts for 50% of Allot's revenue. It had sales of $20 million in the third quarter and a net profit of $3.4 million, beating the analysts' estimates.
The potential in joining up with a company with capabilities in the wireless market is considerable. The wireless carriers' need to open up the bottleneck of their networks is leading to change in the services and equipment they require, and the tenders they publish include more complicated specifications. It seems that Flash Networks' capabilities answer these customer requirements. The company is estimated to have sales of $40 million this year, and it has been profitable for the past two years.
Flash Networks will also bring to the merger a respectable number of wireless carriers, some of them already customers of Allot, and some of them carriers that Allot would be delighted to add to its customer base and to try to leverage sales to them, such as Orange, T-Mobile, Verizon, Vodafone, Wind, and others.
If the negotiations mature into a deal and Allot does buy Flash Networks, the merged company will end the year with sales of $120 million, and will be profitable.
Allot said in response that "the company does not respond to rumors." It was not possible to obtain a response from Flash Networks.
Published by Globes [online], Israel business news - www.globes-online.com - on December 21, 2011
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