Why Oracle Acquired Acme Packet

Tickers in this article: ALU APKT ERIC FFIV ORCL TKLC VOD

NEW YORK ( TheStreet) - In a bit of a surprising move, Oracle(ORCL) announced the acquisition of Acme Packet (AKPT) for $29.25 a share earlier this week, representing a 22% premium on Acme Packet's closing price last Friday. The fully diluted equity value of the transaction is $2.1 billion.

However, taking into account Acme Packet's current assets and cash position, Oracle's cash offer represents a $1.7 billion enterprise valuation. Acme Packet's 2012 revenues were $274.4 million, but the company experienced a net loss of $5.2 million for the full year, both numbers announced earlier this week.

Acme Packet is currently the top vendor in the SBC (Session Border Controller) market, with almost a 50% share, and has been the de-facto leader in this space since its inception, amassing almost 2,000 customers in 109 countries and 89 of the top 100 telecom operators in the globe. SBCs are appliances that manage IP traffic at the edges of various networks, both between service providers or an operator and an enterprise.

The market is undergoing an upgrade cycle driven by the need to replace older, first-generation SBCs in order to support video and other bandwidth-intensive services. In recent months, Acme Packet has been able to replace older SBCs from vendors such as Nextone, and to successfully launch its newest Net-Net 6300 platform. The Net-Net 6300 represents the dawn on a new era of SBC products, supporting increased transcoding, signaling and media volume and complexity, in addition to high-capacity, wire-rate encryption for new applications such as HD (High Definition) Voice, VoLTE (Voice over LTE), WebRTC (Web Real-Time Communication) and other OTT (Over-The-Top) services.

Diameter signaling's another emerging segment where Acme Packet's active. Diameter is an authentication, authorization, and accounting next-generation protocol for telecom networks, the successor to an older protocol called RADIUS. The advent of a new appliance, the DSC (Diameter Signaling Controller) bodes well for Acme Packet, which has a product in this area. The DSC market is expected to heat up, as more wireless subscribers migrate to all-IP mobile networks (4G/LTE). The competitive landscape is a bit tougher as the DSC market is more fragmented, with players such as traditional network equipment vendors (like Alcatel-Lucent(ALU) , Ericsson(ERIC) and Huawei) and specialists (such as Tekelec(TKLC) , F5 Networks (FFIV) , and Diametriq) contending against Acme. Despite not being the leader in the SBC space, Acme Packet has gained some good mindshare in DSCs, reaching a total of 18 DSC customers in Q3 (including operators such as Vodafone(VOD) ), when it notched 9 wins in the quarter alone.

Why Sell Now?

Despite the good future growth prospects, Acme revenues were down 10.7% in 2012 (versus 2011), due to a slower than anticipated uptake of VoLTE rollouts at various carriers. Most operators do not see VoLTE as being ready for "prime time" from a network control plane and operational perspective to justify any meaningful level of rollouts this year.