By Pacific Coast Business Times Staff Monday, September 27th, 2010

The Northern California company set to buy Goleta-based Occam Networks in a $171 million deal says it will keep the company’s engineering staff on the South Coast and in Fremont largely intact after the merger.

“We will continue to have an operation and engineering in Santa Barbara,” said Geoff Burke, marketing director for the buyer, Petaluma-based Calix. “We are going to maintain those facilities and expand some of those facilities.”

Occam is a supplier of broadband backbone equipment to rural telecommunications companies. Calix makes similar equipment. Occam, which had 186 full-time employees at the end of last year, said Sept. 16 that it has agreed to be acquired by sometimes-competitor Calix in a $171 million cash-and-stock deal.

Calix plans to keep Occam’s BLC product line of servers, and it’s expected the two companies’ engineers will work together.

“The idea is that by having engineering and development teams together, they can look at both products and cross-pollinate the technology,” said Russ Sharer, senior vice president of marketing for Occam. “The Occam BLC product line will not only continue, but Calix will continue to invest in it.”

Expected to close next year, the transaction values Occam’s stock at about $7.75 a share. Shares closed at $5.29 on Sept. 15 but have shot up to near the deal value since then. Occam investors will get about $3.83 in cash for each share they own, plus about one-third share of Calix’s common stock. After the deal, Occam investors would own between 16.5 percent and 18.9 percent of Calix’s common stock.

Calix CEO Carl Russo lives in Montecito. He was the former chief operating officer of Xircom, the Thousand Oaks company sold to Intel for $748 million in 2001.

“Since Carl is right there, he’s going to have a fair opportunity to interact with those folks” at Occam’s current Goleta offices, Burke said.

Both Occam and Calix make broadband networking equipment for telecommunications companies. Both firms’ equipment can send high-speed Internet data over older copper or newer fiber networks.

Occam and Calix focus on what are known as access networks. Those are the lines that connect a cable or telecommunications company’s main office to its subscribers’ homes or businesses.

On those networks, several technologies are competing for dominance. Copper is present but fading. Fiber-optic lines and Ethernet, the same technology used to wire networks in big business buildings, are on the rise.

Calix, which already supplies copper and fiber equipment, had begun to work in Ethernet as well. But Occam has been working in Ethernet for nearly a decade. Signals for television and phone service are increasingly being sent in Internet Protocol, or IP. And both companies face competition from larger firms.Calix saw the opportunity to acquire Occam’s engineering talent, which would give its product lineup an edge in an extremely competitive industry, Calix’s Russo said during a conference call discussing the merger.

“When we got into the fiber access business, we figured out that there’s a lot of stuff you learn the hard way. It’s not in the manual. It’s not in the spec sheet. You learn it by going out and deploying,” he said, according to a transcript of the call. “Well, same thing exists in the Ethernet space. The team at Occam has been doing it for 10 years, and I suspect there is a ton of things that they have learned that we are going to learn over the course of developing into this space.”

Calix has eyed an acquisition — possibly Occam itself — for some time. This spring, Calix raised $82.3 million in an initial public offering on the New York Stock Exchange.

“That really was our primary reason for IPOing — to give ourselves a currency for inorganic growth,” Burke said. “It’s not that common for companies to make acquisitions this soon after they IPO. However, our market is moving forward very quickly.”

The deal still needs approval from Occam’s shareholders. However, much of Occam’s stock is owned by venture firms that invested in it. Its board has fully supported the merger, and about 27 percent of shareholders have already signaled approval, Sharer said.

In a conference call between Occam and Calix executives and analysts to discuss the deal, analyst Herbert Chen asked Occam CEO Bob Howard-Anderson how investors should feel about the proposed value of Occam’s stock, which has not topped $7 since 2007.

“I think they should view it as a positive. Clearly there’s a premium to the relatively recent Occam trading,” Howard-Anderson replied, according to a transcript of the call filed by Calix. “There’s also a significant chance to continue to play some of the combined entity stock, since the deal is both stock and cash. … I think they’ll be excited about the possibility to combine enterprises.”

Chen seemed unsatisfied. “OK, well, just speaking for myself, I don’t think the price is adequate, and I think there are probably a lot of shareholders who would agree with me, but we can discuss that in private,” Chen said.

The proposed deal includes a $5.2 million break-up fee if Occam walks away. Occam has about 21 million shares of common stock outstanding. That suggests that any competing offer would have to value Occam’s stock at least 25 cents higher than Calix’s $7.75 to beat the break-up fee.

When Calix bought a Minnesota-based fiber networking company in 2006, it kept most of the firm’s engineers. It says it will do the same for Occam, but less clear is what role Occam’s current management will play. In conjunction with agreeing to the merger, Occam’s board also amended its employment agreements with its executives to give them a full year of severance pay rather than six months.

Occam has about 380 broadband providers as clients and brought in revenue of $23.7 million in the second quarter, up from $21 million the year before.

Analysts have expected Occam to receive a boost from the federal government’s efforts to bring broadband Internet to more Americans’ homes. The first big contract came this summer, when Occam inked a deal to supply equipment for a $101 million project to bring broadband access to rural Western Kansas. Calix announced a similar contract around the same time.

Both Calix and Occam are long-term plays, where customers signed up now tend to stay on the same platform for years to come. That has meant steep losses in hopes of profitability down the line.

Occam has not seen a yearly profit since 2006. It lost $8.9 million in 2009, $6.7 million in 2008 and $10.4 million in 2007. Calix, a larger company by revenue, lost $9.2 million in the first quarter of this year, compared with $12 million the year before.

Editor’s Note: An early version of this article misspelled the name of analyst Herbert Chen.

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