Tut Takes On CoSine

So, after months of speculation, it really is the end of the road for CoSine Communications Inc. (Nasdaq: COSN), which was acquired by Tut Systems Inc. (Nasdaq: TUTS) for $24.1 million on Friday night (see CoSine Sold for $24M and Will CoSine Get Carved Up?).

Tut manufactures a range of telecom equipment, including video trunking, digital TV, and broadband subscriber management devices. But, on a conference call this morning, Tut Systems execs said that the merger was not about getting hold of CoSines technology.

”That was not the primary reason for doing the deal,” according to one exec. Instead, the merger is all about "additional financial resources,” netting Tut Systems around $22.75 million of CoSine's cash.

Tut execs on the conference call were at pains to promise continued support for existing CoSine customers, with a view to winning more business. “We will take care of the customers,” said one exec. “There are a dozen or so key customers, and we will look to leverage the relationship with these customers for other business.”

Should we be surprised by the deal? Kevin Mitchell, analyst at Infonetics Research Inc., doesn’t think so. “I am not that surprised,” he says. “I always thought that the buyer would be for the money and the customer contacts, not the product...”CoSine had a very narrowly focused edge router product, so money and customer contacts were always going to weigh more heavily than technology."

However, Tut is clearly hedging its bets as far as technology is concerned. Although the vendor does not expect to offer any new CoSine products, execs hinted today that some pieces of intellectual property may find their way into Tut’s own offerings.

”We’re evaluating some of that [technology] to see if there are some areas that might help us,” said one exec. “I am hoping that we will find something there.”

That "something else" is most likely to be a piece of security technology from CoSine’s IPSX switch, according to Mitchell: “I would guess that it will probably be the security elements that are of the most interest."

Whatever the long-term outcome of the merger, Tut now faces some serious competition from CoSine’s rival, Quarry Technologies Inc.Quarry, being the friendly neighbor that it is, says it would be happy to accomodate support for CoSine’s IPSX customers, offering to migrate them to Quarry's iQSecure platform (see Quarry Touts CoSine Migration Program). Quarry at one time had considered buying CoSine itself.

The last few months have been tricky for CoSine, to say the least. The first signs of trouble emerged back in July when the company announced it was examining "strategic alternatives" after a poor second quarter (see CoSine: The Big Sell-Off?).

Then, Ernst & Young stepped down as CoSine’s auditor and the company laid off most of its employees (see CoSine: E&Y Says Bye-Bye and CoSine Cuts to the Bone).

In late October, CoSine announced that it had signed an agreement for the early termination of the lease on its Redwood City, Calif., headquarters. The company also released its third-quarter results, posting a net loss of $14.6 million, or $1.47 per share (see CoSine Posts Q3).

The Tut Systems/CoSine deal is expected to close in March.— James Rogers, Site Editor, Next-Gen Data Center Forum