Belden Steals Trapeze For A Song

In a surprise announcement last Friday, Belden announced a $133M cash acquisition of Trapeze Networks. The surprise wasn't so much that Trapeze might be acquired -- privately held and not having had the same level of success as its fierce competitors, it was not altogether surprising -- but who purchased it. There are several enterprise networking vendors that OEM rather than own wireless product line (i.e., Extreme, Foundry, Juniper, etc.) that could have benefited from Trapeze's wireless expertise, no one more than Nortel Networks. Belden's justification for the purchase centered around the complementary nature of the acquisition, but the most obvious tie in would be an existing network equipment vendor, not a vendor who sells "signal transmission solutions." During a post-announcement conference call Monday morning with investors and analysts, Belden executives were asked several times to clarify what they felt were the "comprehensive and networking opportunities" and how it added "stickiness" and "entrenchment" to their existing product lines.

Their responses were unconvincing. It's one thing to sell cables and connectors, it's quite another to sell an enterprise networking solution with moving parts and software bits. Do enterprises typically consider buying their networking equipment from the same guys who sell them 1,000-foot spools of cable? Not often, and so Belden would be wise to retain the Trapeze name and associated brand recognition to keep their foot in the door.

Belden may have other plans, unfortunately, as the company made a point in its prepared remarks and commentary that Trapeze's customers purchase their wireless networking equipment because of its technical capabilities, suggesting that Belden believes it's not the brand name that counts as much as the ability to of the product to perform.

It's unclear what Belden plans to do with its technology partnership agreement with Extricom, made less than two years ago. Extricom hasn't been able to gain a measureable market share (although it would argue that its sales and unit counts aren't shared with market analysts, so how would they know) and Extricom's nontraditional approach to Wi-Fi may not have attracted as many Belden customers as company executives would have liked. Requests to Belden and Extricom for commentary were not answered by the time this was posted online.

Besides their view toward complementary product lines, Belden also appears to be looking for a way to raise gross margins in the potential face of declining cabling sales. In a written statement from Michael Tennefoss, head of strategic marketing, Aruba Networks states that "this acquisition validates that the transition to wireless is truly under way." But any short-term concern is likely overstated. While there's no doubt that structured cabling vendors will face increasing pressure, just like the paperless office, wire isn't going away and the transition to an "all-wireless" office will take many years and almost surely only at the edge. In any case, Belden appeared eager to inject its acquisition"s business into its own, stating repeatedly that Trapeze's operating margins exceeded its own. Belden executives declined to divulge Trapeze's margins.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.The next significantly sized privately-owned enterprise WLAN vendor is Meru Networks. Rumors have abounded over the years regarding acquisition talks by Juniper and others, and an industry source shared that Meru executives have very recently again been hitting the street, peddling the company. Not that Meru wants to be compared with Trapeze. According to Rachna Ahlawat, VP of Strategic Marketing at Meru Networks, the company has a technologically superior and differentiated WLAN product line than Trapeze, pointing out that its revenue isn't based primarily on OEM deals and that its revenue growth hasn't slowed down (indeed, Gartner, Rachna's former employer, named Meru Networks the fastest-growing enterprise WLAN company.

Competitors are likely to try and take advantage of this time of uncertainty. In the same written statement, Michael Tennefoss of Aruba says that its Airwave division (which offers a vendor-neutral enterprise WLAN management system) has announced an investment protection program for Trapeze customers. This almost "ambulance chasing" behavior typifies the competitive and aggressive nature of the enterprise WLAN industry.