Aggressive networking start-up readies debut product

Zhone Technologies, established by former Ascend Communications executives, is taking strategy lessons from some of its much-larger competitors.

3 min read
OAKLAND--A networking start-up established by former Ascend Communications executives is taking strategy lessons from some of its much-larger competitors.

Zhone Technologies, housed near the shipyards here on the San Francisco Bay, next week plans to unveil "gateway" equipment that connects data networks to traditional voice networks. Later this year, the company plans to introduce gear for uniting many kinds of networking technologies.

Although the company is entering a highly competitive market dominated by giants Cisco Systems, Lucent Technologies and Nortel Networks, analysts say a substantive bank account and an acquisitive business strategy just may help it survive.

Mory Ejabat and Jeanette Symons formed Zhone following Lucent's $24 billion acquisition of Ascend in June 1999, incorporating the same month that the ink dried on the largest merger in the history of the networking industry.

"We didn't handle unemployment very well," Symons, chief technology officer at Zhone, said during an interview in the company's temporary offices.

Yet so far the duo has handled building a start-up with aplomb. Zhone has amassed $500 million in funding from the likes of Kohlberg Kravis Roberts & Co., Texas Pacific Group and New Enterprise Associates. The amount is believed to be the largest private placement of funding ever.

The start-up has taken that cash and used it to buy companies and their networking talent--a novel approach in an industry used to upstarts serving as technology "feeders" for acquisitive firms like Cisco.

Zhone offered to buy struggling telecommunications equipment provider Premisys Communications this past October and closed the deal in December. In November, the company also plucked Westlake, Calif.-based CAG Technologies, a firm that specializes in subsystems for networking gear.

The former acquisition could pay off sooner rather than later. Premisys already has $60 to $80 million in expected annual revenue from current products, according to Zhone executives.

Moreover, the new gateway product Zhone plans to ship by the end of the month began development at Premisys. Its introduction is intended to help Zhone win new accounts with communications carriers.

"It gives us a foothold to build our sales and marketing organization," Symons said.

But while Zhone tries to build the carrier accounts it craves, the company will continue to develop new technologies scheduled for release by the end of this year.

Striking an aggressive course, Zhone plans to focus on technologies for the "local loop," the ring of networks that connect residential and business users to sprawling nationwide network systems. Symons said the company hopes to simplify the current combinations of network technologies like cable, digital subscriber line (DSL), wireless and fiber through a single connection point, consolidating several types of technology into one box.

Analysts say Zhone may be targeting the right market. "It's a very hot, large market to be going after," said Hilary Mine, an analyst with industry consultants Probe Research.

But others remain skeptical of Zhone's strategy to deliver a single product for networks that vary widely in size, scope and capacity. They also say the expectations of the company could wither in a cutthroat environment with little patience for a start-up, no matter how rich.

"I think they're going to have a rough time," said Frank Dzubeck, president of consultants Communications Network Architects. "This is a very tough business they're entering."

"I think they need to be extremely aggressive in what they're doing," Dzubeck said. "But their expectations far exceed their prospects at the moment."

For Symons, it is the creation and evolution of a company that keeps her excited.

The Zhone founder can even be found answering the company's phone in the absence of a receptionist. "It's just fun and exciting to make a company happen," Symons said.