Belden Steals Trapeze For A Song: Page 2 of 3

The $133M price tag suggests that Belden purchased Trapeze at a bargain. As one competitor summarized, it was a "fire sale." According to sister site Light Reading, Trapeze had raised $102 M in earlier rounds, which means that this investment resulted in a low return, especially compared with Aruba's $80M IPO (current market cap is above $460 M, even though the price is $9 down from its high of $23.85) and Cisco's $450 M purchase of Airespace almost three and half year ago. Even Belden's CFO stated on the conference call that he felt that it was a "good multiple" after mentioning Aruba and Cisco.

It's unclear why Nortel recently decided to renew its OEM agreement with Trapeze rather than purchase the company outright when the price tag was as low as it was. Nortel, Trapeze's largest OEM customer, could have benefited from immediate access to its supplier's 802.11n portfolio, beating its target to bringing its own 802.11n product to market rather than announcing a six-month slip stretching into mid-2009.

Another unusual aspect of this sale is the fact that Belden will not be able to immediately recognize all of Trapeze's revenue. As a private company, Trapeze wasn't required to follow GAAP accounting rules as dictated by the SEC for public companies. These rules require revenue recognition deferral for elements of the sale that are delivered at a later time (for example, technical support and promised upgrades). Now that Belden, a public company, has purchased Trapeze, it inherits all the sales agreements already executed and must report the revenue of those agreements based on GAAP. If "vendor specific objective evidence" isn't given, all revenue for a bundle of products must be deferred and amortized over time. Belden shared that Trapeze recently renegotiated its OEM agreements to address this accounting liability, but Belden cannot immediately recognize the full value of any past bundled sale that includes deferred elements. According to Belden's CFO, the company would like to have all these revenue-deferral issues addressed by the end of calendar year 2009, if not earlier, but there's no guarantee (i.e., who knows how many deals included 3 years of tech support). In the meantime, the Trapeze purchase will have a dilutive effect on Belden's earnings for the next few quarters.

Trapeze's major OEM partners are Nortel Networks, 3Com, D-Link, and Enterasys. What distinguished Trapeze as business from its early competitors (Airespace and Aruba, specifically) was its emphasis on OEM deals. These OEM relationships generated unit volumes, but had smaller margins that still required development and technical support. OEMs contributed at least 50%, some say up to 70%, of Trapeze's revenue, but at the expense of growing Trapeze???s own channel and brand. It's not to say that Trapeze didn't have some early success, pursuing third-place market share after Cisco and Symbol (now part of Motorola), but they always appeared to be on the coattails of Aruba. Trapeze also bolstered its internal sales staff and marketing late in the game.

Trapeze's OEM partners weren't all that committed, either. Nortel publicly announced last year that it was pursuing the development of its own 802.11n product line, and 3Com, selling primarily to the SMB market, offers its own wireless gear, too. Enterasys, having gone private, has now shifted its focus toward the security market; the wireless component of its business has become a footnote on their Web page.