Hewlett-Packard Challenges Cisco with Colubris Deal

Hewlett-Packard has agreed to purchase Colubris Networks, a heavily backed technology-bubble survivor that has weathered management shake-ups and a perilous market for independent wireless networking companies.

Terms of the all-cash acquisition, which is expected to close Oct. 1, weren't made public, but one Colubris investor said he was pleased with the deal.

"This is a good exit for everybody," said Charles Lax, a GrandBanks Capital managing general partner who had a seat on Colubris' board. "We're very happy."

HP's networking division, ProCurve, can now go head-to-head with Cisco Systems Inc. (CSCO), which became a major player in the wireless LAN arena with its 2005 purchase of networking company Airespace for $450 million.

LANs, or local-area networks, deliver WiFi connectivity to office buildings, hospitals and other dense areas by moving traffic between a central site and distributed points.

"Cisco has the lion's share of the (local-area network) market, but we now have a strong portfolio," said Marius Haas, general manager and senior vice president of HP ProCurve. "This broadens our market segment to hospitality, transportation and health care."

Waltham, Mass.-based Colubris was founded in 1999, and raised some $50 million in venture backing from GrandBanks, DCM, Business Development Bank of Canada, Prism VentureWorks, Mid-Atlantic Venture Funds and Telecommunications Development Fund.

Rumors about Colubris running into financial problems abounded last year, as the company appointed its third chief executive, Rob Scott, after losing two others since 2006. Colubris shifted gears in early 2006 when it replaced longtime CEO Barry Fougere with Robert Eisenberg, and eliminated 11 staff members, in order to expand its focus to enterprise markets from selling to Internet services providers. Eisenberg left later that September for personal reasons.

Haas said it was likely that all of Colubris' 100 or so employees would find a new home at Palo Alto, Calif.-based HP.

Lax, the GrandBanks partner, said that, with a constrained market for initial public offerings, consolidations like the HP-Colubris deal are now the norm.

Big networking players such as Cisco and HP "have to offer WiFi," he said. "This is a core offering now. You either have to build it or buy it...There's a $100 million revenue bar for going public, (so) consolidation is inevitable."

While such mergers may please investors, they make life tougher on independent LAN providers, start-ups that have neither the name-brand recognition nor the resources to compete with larger companies.

Forrester Research analyst Chris Silva told Dow Jones earlier this month that the wireless LAN market may be peaking, as the number of potential acquirers is shrinking with each deal, and it remains difficult for start-ups to go public.

The "good exit" for Colubris investors bucks recent trends in the wireless LAN space. Venture backers saw tepid returns in the recent sale of LAN provider Trapeze Networks to cable provider Belden. Terms of that deal weren't disclosed.

LAN provider Aruba Networks, after going public last year, soared nearly 30% to $14.15 per share on its first day of trading on the Nasdaq Stock Market, but trades today at about $6.40 a share.

Other start-up LAN providers will likely have to fight hard for "small scraps of market share," Silva recently told Dow Jones.

-By Timothy Hay, Dow Jones Newsletters; 415-439-6625

(END) Dow Jones Newswires

Posted to the site on 12th August 2008