Chromatis Networks

An optical communications company

Chromatis Networks was founded in 1997, led by Rafi Gidron and Orni Petruschka, after the sale of Scorpio, where they had worked before. A 1998 Globes article also lists Yair Oren, Yossi Shussman and Steve Koren as founders. The company had offices in the United States and a development center in Petah Tikva. It developed equipment for metropolitan communications networks, which connect business customers to the communications infrastructure. The JVP fund, led by Erel Margalit, was one of its investors. Chromatis tried to meet the growth of data traffic by making use of optical fibers and of equipment designed for networks that serve a metropolitan area.

What Metropolis was meant to do

The Metropolis product was meant to combine data, voice and video services in a metropolitan network and carry them in a system based on wavelength division multiplexing, WDM. In this method, signals at different wavelengths can travel through the same fiber. Lucent's report for 2000 described the product as a solution meant to improve the cost, efficiency, capacity and management of multi-service networks. Of a purchase price of about $4.76 billion recorded in the report, $428 million was attributed to development not yet completed, the first generation of Metropolis, and about $4.2 billion was recorded as goodwill. Lucent estimated that the product's revenue would reach $375 million in 2001 and $1 billion in 2002; at the time of the acquisition, the product had not yet been sold to customers.

The announcement and completion of the deal

On 31 May 2000, Lucent's acquisition of Chromatis was announced. Globes reported that Lucent would issue shares worth about $4.5 billion for the shares it did not already hold; including the earlier stake held by Lucent Ventures, this reflected a company value of about $4.8 billion. Lucent's annual report recorded a purchase price of about $4.76 billion in shares and options. All the amounts are share values at different dates and under different definitions, not cash payments. Lucent's annual report said the acquisition was completed on 28 June 2000. Because the price was paid in Lucent shares, the value of the holdings of those who received them was affected afterward by the share price.

The milestone and the shutdown

When it was announced, it was the largest acquisition of an Israeli company up to that time. When HP's acquisition of Mercury Interactive for about $4.5 billion was announced in 2006, Globes described it as the largest cash deal in Israeli high tech, and noted that the Chromatis deal had been larger but was paid in shares. In the following months, Lucent's share price fell sharply, and during 2001 Chromatis struggled to sell its systems: in May 2001 management told employees about cuts in benefits, and in July 20 employees were laid off. At the end of August 2001, about 15 months after the announcement, Lucent shut down Chromatis as part of its recovery plan, discontinued the Metropolis MSX product line developed there and laid off about 150 employees, most of them at the development center in Petah Tikva. In its annual report for 2001, Lucent recorded a write-off of about $3.7 billion of goodwill and intangible assets following the discontinuation of the Chromatis product portfolio.

Legacy

Chromatis no longer exists as an independent company, and its intellectual property remained with Lucent. Because the price was paid in shares, the fall in Lucent's share price eroded the value of the deal for the founders, investors and employees: according to Globes, the JVP fund distributed the Lucent shares it received only in February 2001, after their value had dropped by tens of percent, and many employee options lost their value, although most employees managed to exercise some of them. Chromatis is remembered as an example of a high valuation set during the tech bubble for a company whose product had not yet been sold, and of the gap between the announced amount and the business result. The president of Bell Labs, Jeong Kim, told Globes in 2009 that Chromatis was an example of something wrong that Lucent did.