Nortel deal puts Xros on fast track

When Nortel Networks Corp. announced a deal last week to buy Xros Inc. for about $3.25-billion (U.S.) in stock, many of the 90 employees at Xros became instant millionaires -- at least on paper.

The acquisition is scheduled to close in three months. Along with gains from their stockholdings, Xros employees will lose something as well: any excuse they may have had for failure.

If Xros (pronounced kai-ros) had decided stayed independent, employees might have wondered whether the company had the clout and resources to succeed in the cutthroat telecommunications market, says Xros president and chief executive officer Greg Reznick, 44.

Those worries -- and potential excuses -- are gone.

"What we are doing [with the acquisition]is saying: 'Guys, we have just removed every possible obstacle to getting this product to market,' " Mr. Reznick says. "It's now entirely up to us to get this thing done."

Sunnyvale, Calif.-based Xros is developing optical networking switches that use thousands of tiny mirrors to reflect light pulses sent through fibre-optic lines.

Fibre-optic networks send communications signals as pulses of light, rather than as electronic signals. To manage traffic on the networks, carriers sometimes have to switch light pulses into electronic signals, and then back into light pulses.

Xros's devices eliminate that step, and let networks carry more signals at a lower cost. The company has been working on its technology for about five years, and expects its switches to hit the market in 2001.

Xros switches will complement technology developed by Qtera Corp. (which was bought last year by Nortel for $3.25-billion U.S.) to ship signals over long distances.

In striking a deal with Brampton, Ont.-based Nortel, Mr. Reznick weighed financial, strategic and cultural issues to determine the best possible outcome for Xros and its employees.

He came to the company with such juggling acts in mind. A 20-year veteran of Silicon Valley, with most of his experience in the personal computer sector, Mr. Reznick joined Xros in mid-1998.

At the time, the company, founded in 1996, consisted of founder Armand Neukermans and one micromachinist.

What the company lacked in size, it made up for in scientific promise. Dr. Neukermans had developed, and patented, numerous advances in micro-mirror technology, working with silicon mirrors about the size of a baby's fingernail and computer controls that could tilt the mirrors with microscopic precision.

Mr. Reznick, introduced to Dr. Neukermans by a mutual friend, signed on to help determine the technology's commercial potential.

It didn't take long to determine that Xros's innovations were well suited to the fibre-optic sector, where every leap in capacity seems to be met by ravenous demand for more supply.

"It became apparent that of the many applications this technology was applicable to, this one [optical networks]was very well timed -- in terms of market readiness, and in terms of great match of technology to market," Mr. Reznick says.

Others soon agreed. Xros obtained seed funding from Menlo Ventures, a leading California venture capital firm. Last year, Xros raised a further $25-million, from Menlo, New Enterprise Associates, also headquartered in California, and Greylock Management Corp. of Boston.

Those three firms, along with employees and management -- Mr. Reznick declines to give a precise breakdown -- own Xros. David Aranoff, a general partner at Greylock, said last week that the venture capital firms, though delighted with their potential return on the Nortel deal, were eager to pour more money into Xros, and had hoped to back the venture until it went public.

So why the sale to Nortel?

Mr. Reznick says the decision came down to speed, and efficiency.

"At this juncture, we understand the technology and how to build the product. And I was about to spend an enormous amount of time, energy and money on building support organizations, all of the other things it takes to get a product to market."

Rather than build that infrastructure, Mr. Reznick decided it made sense to let someone else take care of it. In an exchange that's become standard operating procedure for technology companies, Nortel acquired leading-edge technology and a crew of bright minds.

Xros, meanwhile, struck a bonanza for its shareholders -- and access to the world-wide customer network and a corporate infrastructure that knows about getting products to market, and doing it quickly.

"We don't necessarily have all of the experience of building the support organizations for a major telecom product," Mr. Reznick says. "And we think Nortel does that as well as anybody, if not better."

One factor that was not an issue in his deliberations was nationality. Nortel is Canadian, but it operates globally. Many of its customers -- along with employees and senior executives, to the chagrin of Canadians who see that imbalance as evidence of a troublesome brain drain -- are based in the United States.

Nationality was irrelevant, Mr. Reznick says.

"That wasn't an issue -- it was [Nortel's]patent portfolio, their business portfolio, their interest and understanding of the [Xros]group. And Nortel has a big presence in the valley.

"It's more about style and energy than whether they are Canadian or East Coast or West Coast. We feel the chemistry is really good."