Monday, February 4, 2008

Execs: Newly wed Arbor, Ellacoya look at IPO

By Efrain Viscarolasaga

On the surface, the acquisition of Merrimack, N.H.-based Ellacoya Networks Inc. by Arbor Networks Inc., which is scheduled to close this week, is a technology integration.

But since it was announced, the deal has been positioned less as an investor exit and more as a combination that could grow to be the region's next telecommunications initial public offering.

On the product side, the deal is expected to bolster Lexington-based Arbor's product offering to service providers, adding application-level deep packet inspection technology to its own network security platform. And while financial terms of the deal have not been released, the two companies combined for $70 million in revenue last year, and executives said the new company expects to breach $100 million in 2008.

Combined, the two companies have raised more than $167 million in private funding ($145 million for Ellacoya, $22 million for Arbor). Yet as the deal nears completion, all the investors in both companies, including local firms Atlas Venture (Waltham), Flagship Ventures (Cambridge), Canaan Partners (Westport, Conn.) and Battery Ventures (Boston), have remained on board, Ellacoya board member and Atlas Venture senior partner Barry Fidelman said.

"(The deal) gives both companies a chance to reach critical mass," Fidelman said. "That would certainly help an eventual exit, and make it happen quicker."

Neither Fidelman nor Arbor co-founder and CTO Robert Malan would commit to definitive IPO plans, but both acknowledged it as a natural progression for the new firm.

"I don't have a crystal ball, but both companies were thinking about (an IPO) when they were (individually) below $100 million," said Malan. "The goal this year is to execute on the sales and growth plan, and if we do that, an IPO could be a possibility."

While New England has seen three telecom-related IPOs over the past 18 months -- Acme Packet Inc., Starent Networks Inc. and Airvana Inc. The previous seven years saw none.

Growing large public companies locally has become critical to growing the entire telecom industry, according to Massachusetts Network Communications Council director Mark Horan, and these kinds of deals help. "These are the kinds of deals we like to see," Horan said. "You need to have large, headquartered companies here to grow the region and eventually help nurture and spur new companies and new innovations."

Once the deal is capped, Arbor Networks is expected to have 280 employees, the majority of which would be New England-based, according to Malan.