Paceline Angles for Buyout

These are sub-zero days for InfiniBand startups, and the latest to get caught in the cold is Paceline Systems Corp., which is actively seeking to get acquired or line up a strategic investor.

Barry Kallander, Paceline's president and CEO, says the company decided in early December to pursue an M&A strategy, "given the continued weakness in the economy and the InfiniBand market specifically."

The Acton, Mass., startup has "talked to every significant player in InfiniBand and the Tier 1 systems vendors," says Kallander, who claims that at least one major systems company is showing interest. Paceline makes intelligent InfiniBand switches designed to cluster servers in high-performance computing environments (see IB Startups Gear Up).

In recent weeks Sun Microsystems Inc. (Nasdaq: SUNW) has been kicking the tires on the company, says a former Paceline employee, who did not want to be named. The source says, however, that Sun is interested mainly in acquiring Paceline's intellectual property: "They wouldn't bring over any of the employees." Sun representatives declined to comment; Kallander would not confirm whether Sun is one of the parties it's in talks with.

It's worth pointing out that Pirus Networks, the storage virtualization switch startup Sun bought for $165 million in September 2002, was located down the road from Paceline in Acton's Nagog Park business park (see Sun Beams on Pirus).As InfiniBand's prospects continue to dwindle, the sector is becoming ripe for consolidation. For example, IB startups Lane15 Software and InfiniSwitch Corp. reportedly have been looking to join forces (see InfiniBand Merger in Play?).

Time may be running out for Paceline. The ex-employee says the company's board of directors has already decided that if no deal emerges by the end of January, it will pull the plug.

Kallendar denies this, saying, "We have not made a decision to wind the company down at the end of January. There's been no board decision to do that." While he would not say how much cash Paceline has left, he says there is enough in the bank to last "several months."

Paceline has received about $21 million in funding from BancBoston Capital, Kodiak Venture Partners, Commonwealth Capital Ventures, ABS Ventures, and Goldman Sachs & Co.

Paceline has cut its headcount from a high of 58 a year ago to around 40 today. "We did a small layoff at the beginning of the month to bring cash-flow in line," Kallendar says. Kallendar joined the startup as CEO in September 2002 (see Paceline Replaces CEO).In addition to the limp market for InfiniBand, Paceline was rocked by IBM Corp.'s (NYSE: IBM) decision in December to discontinue its InfiniBand chip development. "IBM forced our hand, and we needed to do a retrofit on our first-gen product," Kallendar says. Paceline is now shooting to deliver its first switch, based on Mellanox Technologies Ltd. silicon, in early February (see IBM Kills InfiniBand Chip and Paceline to Use Mellanox IB Chips