ADC Buys Broadband Access Systems

ADC Buys Broadband Access Systems For $2.25 Billion
By David Aponovich
September 20, 2000

Broadband Access Systems, a private, two-year-old Westborough maker of network access equipment that lets cable TV companies deliver Internet access and phone service through their networks, is being acquired by ADC Telecommunications for $2.25 billion in stock.

Not bad for a company that launched in February 1998, has 198 employees and only started shipping equipment to cable providers such as Time Warner, Adelphia and Tele-Media in April.

But Broadband Access Systems has tapped into what’s shaping up to be a huge market: Making Internet Protocol-based (IP) platforms to support broadband Internet and telephone service over cable and digital-subscriber line, or DSL, networks. DSL service permits high-speed data traffic on traditional copper phone wires.

ADC, a Minneapolis company that has nearly $3 billion in sales and about 21,000 employees, has gone on a buying binge this year, acquiring several companies that make equipment to service that market. One of its buys this summer was PairGain Technologies for $1.6 billion.

ADC is growing as it anticipates the huge sales potential in both the cable modem and DSL business in the next several years. The potential market gives the acquisition of Broadband Systems a giant upside: ADC Chief Financial Officer Robert Switz said revenue from Broadband Access is expected to grow from $5 million this year to $60 million next year to as much as $500 million by 2004 or 2005.

“This acquisition places ADC in a more powerful position to capture share in the high-growth market in the IP-based” networking business, said William Cadogan, CEO and president of ADC.

Though targeted mainly at cable systems, Broadband Access equipment can also serve the DSL and wireless markets.

To acquire the Westborough firm, ADC will issue $2.25 billion worth of common stock. The number of shares issued will depend on the share price leading up to the deal closing, which could possibly occur by the end of October, officials said.

ADC is getting critical technology and products to add to its offerings, and it’s also getting nearly 200 skilled workers — a fact not lost on ADC’s CEO.

“We obtain highly skilled Internet talent, which is a scarce commodity these days,” said Cadogan. Among Broadband Access’ employees are about 90 engineers, 60 in software and 30 in hardware, officials said.

The acquisition makes winners out of the seven founders of Broadband Access as well as their full-time employees, all of whom own shares in the company. Among the founders are three former Digital Equipment Corp. managers, CEO Dave Paolino, COO Abbot Gilman and Willem Engelse, whose title is technical consultant.

Also reaping a reward are equity investors Matrix Partners, with 26.6 percent of the company’s shares, and NorthBridge Partners, with 13.9 percent, among several others. They were the leaders in a total of $72 million worth of venture funding that came to the company in several rounds, including a $45 million round last January.

BAS Vice President of Marketing Mark Komanecky said Paolino, Gilman and Engelse in the early 90s formed another successful venture, Applied Network Technology, which was acquired in 1995 by Fore Systems.

Komanecky said BAS was preparing to go public before ADC came calling.

The acquisition “is another example of hard work and executive on the part of a team that started with modest means and has grown to be a company with 200 people,” Komanecky said.

The market for residential high-speed Internet access is expected to boom through 2004, according to Dataquest research. Between 1999 and 2004, North American access through cable networks is expected to grow 53 percent a year to 16 million households, while DSL network subscribers are expected to grow at an 85 percent annual clip, to 11 million homes.

Cable telephone service is expected to grow rapidly, too. Strategis Group reports that between 2000 and 2005, homes with telephone over cable are expected to grow 130 percent a year, to 13 million.

The acquisition is subject to a collar on the value of ADC’s stock between 34.127 and 41.711, meaning ADC will issue between 54 and 66 million shares, depending on the market price when the deal closes.

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