Paradyne's wild ride is about to take a new turn

Published July 11, 2005

Call it deja vu with DSL.

A California telecommunications company said Friday it will purchase Largo's Paradyne Networks. The deal makes Zhone Technologies the latest buyer in Paradyne's 36-year roller coaster ride marked by enthusiastic-turned-grumpy owners.

I must confess up front I have a special fondness for Paradyne. The Ulmerton Road company has struggled mightily at times in its quest to survive and occasionally even prosper in the intensely competitive world of data modems and, more recently, DSL and the high-speed data networks industry.

Over the years, the company has boasted more than its share of likable and brainy R&D geeks, dedicated engineers, chest-pounding marketing managers and committed executives who, time and again, have come this close to pulling it all together as a publicly traded corporation with a long-term record of success. Paradyne also has salted many other area tech companies over the years with its former managers.

There are lessons in Paradyne's sale and the latest loss of a rare public company headquartered in the Tampa Bay area. The best ideas in technology don't mean squat without good execution in delivering them to the market. Aging tech can only be peddled for so long by even the best sales folks. And distant owners looking only for the best moment to cash out can make lousy corporate stewards.

Now comes the younger, richer Zhone Technologies in Oakland, Calif., with plans to purchase Paradyne for about $148-million, based on Friday's stock prices, to broaden its product line and its base of customers.

What will happen to the Ulmerton facility and its employees is not yet clear. Zhone will cut staff and overlapping operations, as any buyer must in such a merger. The details will become better known in the coming months.

The early market reaction is underwhelming. Paradyne shares rose 48 percent Friday after the deal was unveiled. Zhone shares sank 20 percent. It's coincidence, but the two company stocks closed Friday just 8 cents apart - $2.79 for Paradyne, $2.87 for Zhone.

Goodbye, PDYN. Hello, ZHNE. The new ticker symbol should replace Paradyne's by this fall when the Zhone acquisition is complete.

Just six years ago, the company went public in a frenzy at $17 a share and closed that day at $56.25 after 12.5-million shares had changed hands. Plenty of folks walked away rich, not long before the tech bubble burst.

Paradyne's history is rife with stories of a business saved time and again from extinction.

In the 1970s, the young Largo company struggled before brining in new management. "They've risen like a phoenix out of the ashes" is how one New York broker described Paradyne back then.

By 1989, Paradyne was bought by AT&T, where it enjoyed a rich and giant parent eager to exploit the promising market for modems. But it later became ignored as a small cog in a big machine.

Texas Pacific's purchase of Paradyne was a fresh opportunity to revive Paradyne. A new CEO with a penchant for playing ice hockey in Florida arrived and prospects improved. The company went public and all seemed great until 2000, when tech stocks dropped off a cliff.

Now it's Zhone's turn.

Zhone is run by Mory Ejabat, a tech company whiz with an unconventional streak and two claims to business fame.

First, in 1999 Ejabat sold a company called Ascend Communications to Lucent Technologies for the stunning price tag of $20-billion. Ejabat walked away from that deal with $110-million in stock, but not before scaring the daylights out of his investors.

The tale is recounted in Fortune magazine stories from the late 1990s. Ascend's stock had tumbled from $79 to the low $20s, prompting Fortune to call Ascend as the "scariest tech stock ever." Ejabat was in the hot seat with investors and analysts.

Ejabat brought Ascend back in favor by hiring top engineers to improve the product line and a financial executive to soothe Wall Street. The comeback apparently convinced Lucent, which soon snapped up Ascend for a small fortune.

Second, in that same year, Ejabat started Zhone and raised a remarkable $500-million in initial financing from investors that included Kohlberg Kravis Roberts & Co. and the Texas-Pacific Group.

That would be the same Texas-Pacific Group of private investors who bought a controlling interest in Paradyne for $175-million in 1996. It sold its last shares in Paradyne last year. Now Paradyne will be reunited. Texas-Pacific holds a 9.5 percent stake in Zhone.

In a Friday conference call with a few skeptical analysts, Ejabat defended Zhone's proposed purchase and Paradyne's turbulent performance.

"I would not put Paradyne among failing companies," Ejabat said. "This has been a well-run company and I think they have done a great job."

This is not the first time Zhone's CEO has conjured a little business magic. Let's see what he can do.

-- Times researcher Caryn Baird contributed to this report. Robert Trigaux can be reached at 727 893-8405 or trigaux@sptimes.com