A difficult path lies ahead for DASAN Zhone Solutions Inc.
On Tuesday April 12, 2016, Korean based Dasan Networks said that it will acquire Zhone Technologies through share swap. Under the deal, Zhone will acquire Dasan Network Solutions from DASAN networks and in exchange, will issue Zhone common stock representing 58 percent of the combined company.
The new merged entity will be named Dasan Zhone Solutions and will enable a backdoor listing of Dasan Networks on NASDAQ in the U.S.
Dasan Zhone Solutions Inc. will have two co-CEOs and a board of directors will four board members appointed by DASAN and three appointed by Zhone.
Similar to many other Telecommunications mergers & acquisitions, the combined company will benefit from a larger combined customer base, as well as leverage economies of scale from operators, support, engineering and sales.
The deal is expected to close by the end of the third quarter 2016.
Zhone Technologies was formed back in September 1999 by former executives of Ascend Communications Jeanette Symons, Mory Ejabat and Robert Dahl and quickly went on an acquisition spree during its product development phase. It became a public company via its merger with Tellium Networks in 2003. In its first 6 years of operation, Zhone made a dozen acquisitions, with the most notable being Paradyne in 2005 – and by notable I mean, it was one of the only acquisitions to actually improve its revenues and market position, but not significantly and not for long.
Zhone’s challenge has always been – in my opinion – its lack of focus.
It has been selling on a global basis since its inception without any particular focus.As such, it has never had an impact in any region and counts no Tier 1 wins to its credit. It has also been slow to introduce both new platforms and new technologies.
While it does have a DSL platform that continues to ship a few hundred thousand ports per year – its strongest years are long behind them in 2007/2008. In addition, while the market has shifted its focus towards VDSL2 Vectoring and G.fast – Zhone has been noticeably silent on these topics for years.
To understand its DSL position is to compare its cumulative DSL port shipments (8 million) against its competition. Calix – with a sole North America focus on DSL has shipped over 10 million, ADTRAN over 74 million (includes Nokia Siemens DSL biz), Nokia at nearly 300 million
From a FTTH standpoint – Zhone has clearly put more effort into this segment – focusing on a ripe Middle East market to sell its solutions into Etisalat and Du, while also spending considerable efforts on the Passive Optical LAN segment. But the reality is that none of this is really contributing to its revenues – which average around $24 million per quarter.
While Dasan has been a key supplier of FTTH to its domestic market (South Korea) – it has also supplied its broadband technologies to a number of large customers such as BSNL, Viettel (Vietnam), Softbank & KDDI (Japan) as well as a number of other operators primarily located Asia Pacific. However, it has seen success with its FTTH products in Eastern Europe and Russia.
Dasan set up a US subsidiary in 2010 – with its focus on leveraging the growing demand for FTTH within North America. Unlike Zhone, its product portfolio is more diverse – with products not only in Broadband Access, but also Mobile Backhaul and Ethernet Switches. To date, this subsidiary has made a negligible contribution to overall revenues.
Dasan Zhone Solutions
The combined company will offer a more balanced geographic customer base – with Dasan providing Zhone with a strong presence in Asia Pacific, while Zhone offers opportunity in North America, EMEA, and CALA.
There is significant product overlap – and although they have stated that they will continue to sell products from both companies and continue R&D on existing product lines – this seems both unrealistic and impractical to achieve some of the cost savings synergies.
However, it will provide Zhone with much needed ultra-broadband copper technologies as well as more advanced FTTH solutions, while Dasan will gain POL products.
The anticipated revenue of the combined company is expected to be $250 million annually – however, it is not clear if this will be achieved on Day 1 or if it is a longer term goal.
Although this combination will provide some immediate scale – it is difficult to see the longer term play – with the exception that Dasan gets a seat at the NASDAQ table.
Although as combined, they gain some strength in the market – they still remain a relatively insignificant player in the overall market – up against companies such as Nokia, Huawei and ZTE with far more extensive product lines and solutions, companies such as ADTRAN, Calix, ECI, which are viewed as more established and reputable.
This may be a perfect example of too little too late and we foresee a difficult path ahead for Dasan Zhone Solutions Inc.