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Amid activist shareholder pressure, the current depressed valuation of Massachusetts-based Sonus Networks may have reached a level that could pique the interest of either strategic buyers or private equity firms, industry bankers said.
In addition, if Sonus’ technology continues to maintain its 30%-plus market share, it could interest private equity buyers such as the Gores Group that specialize in scooping up publicly traded mid-sized technology and telecommunications companies, the banker said. Sonus started developing its softswitch technology which provides a more cost efficient way to transport voice traffic over IP networks more than 10 years ago, a company spokesperson said.
However, a second industry banker believed a strategic buyer showing interest in Sonus is more likely than a private equity firm, noting that financial buyers are wary of acquiring a single-product technology company in an industry with few end buyers and sluggish growth, such as the telecommunications sector.
Sonus (SONS) has been under attack from its largest shareholder, The Legatum Ltd, a Dubai-based investment fund, which has asked to have two seats on Sonus’ board. In its 23 June letter to Sonus’ board, Legatum said the company had “persistent operational failures” and a “continuing lack of transparency”. Sonus has since adopted a “poison pill”.
According to filings, Legatum is underwater in its Sonus investment, with the investment firm having purchased shares above USD 8. Sonus currently trades at USD 3.80 per share. The company’s share price has declined this year, having lost 37% of its market value since the beginning of 2008.
A Sonus shareholder said larger telecommunications equipment providers could be interested in Sonus, however, those companies have been experiencing difficult times. But at the same time European players such as Ericsson and Siemens could be interested in what the shareholder called Sonus’ strong position in the softswitch business. The shareholder said potential acquirers could find the prospect of replacing the older legacy class-five switches with new technology soft switches. He noted Nortel and Alcatel-Lucent were the large incumbents in the old circuit-switched industry.
A second shareholder said the strategic direction that larger players were moving in would dictate whether Sonus would go to an Ericsson, for example. He said Ericsson was still deciding whether it wanted to enter that part of the networking space. This same shareholder said Chinese companies could also look at Sonus.
The first shareholder said that while Sonus is a great operator in terms of providing products and dealing with clients, the company has suffered from poor execution when dealing with Wall Street’s disclosure requirements. Sonus has in the past been late in filing its 10-K reports with the US Securities and Exchange Commission (SEC), but has recently come up to speed. The difficulties for a smaller company to meet SEC compliance, in addition to added expenses, could be a logical reason for Sonus not to remain public. The shareholder said that mid-tier public companies like Sonus often had difficulty complying with SEC regulations such as Sarbanes-Oxley.
The second shareholder said because of these glitches in the reporting side, Legatum had a legitimate gripe with management. However, the first shareholder said the new CEO Richard Nottenburg, who joined Sonus from Motorola this year where he was acting as chief strategy officer, had been meeting with shareholders to “smooth things over”. The shareholder said he has yet to have had a conversation with Nottenburg.
The other difficulty Sonus confronts is its size relative to larger service providers. For example, Sonus has lost orders due to concerns surrounding the company’s staying power. Therefore, being part of a larger organization would address this concern, the second shareholder noted.
This news service reported in May, that with the recent appointment of Nottenburg, it was likely for the company will remain independent.
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