CNT Walks Off With Inrange

CNT (Nasdaq: CMNT) has acquired Inrange Technologies Corp. (Nasdaq: INRG) for $190 million in cash, merging two high-end storage networking players in a deal that analysts say is probably the best possible outcome for Inrange (see CNT to Acquire Inrange for $190M).

Also today, Inrange warned that its first-quarter 2003 revenues would be in the range of $39 million to $41 million, considerably lower than the previous $51.1 million estimate by analysts polled by First Call. Inrange's parent company, SPX Corp. (NYSE:SPW), has reportedly been looking to offload the struggling subsidiary for some time.

"Inrange needed to get acquired," says John Roy, analyst at Merrill Lynch & Co. Inc. "They were losing out to Brocade Communications Systems Inc. [Nasdaq: BRCD] and McData Corp. [Nasdaq: MCDTA] -- and then, here comes Cisco Systems Inc. [Nasdaq: CSCO]."

He adds that the deal will allow CNT and Inrange, which both sell SAN extension products, "to get together and stabilize their position."

On news of the acquisition, CNT's stock plunged nearly 28 percent, to $5.10 per share, while Inrange closed up 2.8 percent to $2.28 per share. The price tag of $190 million, or $2.31 per share of Inrange, is only a 4 percent premium over Inrange's Friday closing price of $2.22. The deal would leave the combined companies with around $50 million cash on hand.On a conference call with analysts today, Tom Hudson, chairman, president, and CEO of CNT, said that "Inrange is extremely complementary to CNT." The deal will expand the combined companies' customers to 4,000, with Inrange providing a strong European base, he said. In addition, Inrange brings CNT a sizeable services business, with break/fix maintenance contracts worth $100 million and consulting services revenues of $60 million annually.

"Overnight, this makes CNT one of the world's largest providers of storage networking products and solutions," Hudson said. CNT says it expects the acquisition to be accretive to earnings per share by at least 10 percent in 2003.

To its existing portfolio of SAN extension products and services, CNT will be able to offer Inrange's high-end Fibre Channel directors. The Inrange FC/9000 provides up to 256 ports in a single switch and also supports Escon and Ficon mainframe storage networking protocols. "This looks like a way of both companies being able to diversify their revenue base," says Harry Blount, senior storage research analyst at Lehman Brothers.

CNT has around 700 employees and Inrange has 760. Greg Barnum, CNT's CFO, says the company is "already working on an integration plan... including eliminating duplicate costs," indicating that layoffs are in the offing. CNT expects to see annual savings of between $10 million $15 million, starting in early 2004. Both Inrange and CNT have cut their headcounts in the past year (see CNT Lays Off 10% of Workforce, CNT Can't Smooth It Out, and Inrange Lays Off 70).

However, analysts wonder how well CNT will be able to compete against the two stronger incumbents in the SAN switching space -- Brocade and McData -- and at the same time cope with Cisco's entry into the market. Cisco, in particular, is looking to achieve synergy between its dominance in wide-area IP networks and the rollout of its MDS 9500 Fibre Channel directors (see Cisco Ups SAN-Over-Optical Ante and Sprint Puts Cisco to Test).Hudson says Inrange is already established at the high end of the market and that Cisco and Brocade have yet to prove themselves in the director segment. "While Cisco is big, and I wouldn't want to underestimate my competition... we lead the market today in Fibre Channel over IP, and we're certified with all the storage vendors. Storage and networking are two very different worlds, and we have several thousand implementations in this area."

CNT also expects to try to persuade EMC Corp. (NYSE: EMC) to start reselling the Inrange FC/9000 system. EMC currently resells Brocade and McData switches, as well as CNT's storage-extension devices. "McData's primary channel is EMC... We'd look to introduce [EMC] to [the Inrange] product and follow-ons, and establish an even broader channel. We think we have the means to do that, or at least interest them in doing that."

The acquisition, which has already been approved by the boards of both CNT and SPX but still needs regulatory approval, is expected to be completed by mid-2003. CNT has not yet decided whether it will keep the Inrange name, says company spokeswoman Jennifer Weidauer.

CNT's financial advisor is Bear Stearns & Co. Inc.; and its legal advisor is Leonard, Street and Deinard. SPX's legal advisor is Fried, Frank, Harris, Shriver & Jacobson. [Ed. note: Apparently, Inrange isn't being advised by any outside party.]

Todd Spangler, US Editor, Byte and Switch