May 29, 2000

Lucent Technologies, the world's biggest telecommunications equipment maker, is poised to pay around Dollars 5bn (Pounds 3.4bn) in stock for Chromatis Networks, a two-year-old private company, to break into the fast-growing optical networking business.

If concluded, the deal would be one of the highest prices yet paid by traditional equipment makers rushing to stake a place in a technology that is transforming their industry.

It would also boost Lucent in a field where it has fallen behind rival Nortel, which has mounted a series of acquisitions, and specialists such as JDS Uniphase.

A US source close to the deal yesterday said negotiations were at a "very advanced" stage. An announcement of a deal is expected within days.

Chromatis produces equipment that increases the speed of the local communications networks covering metropolitan areas. Most investment in optical technology so far has taken place in long-distance communications "backbones" rather than local networks, making this one of the next big growth areas.

"Chromatis provides the ability to virtually expand the capacity of the fibre-optic metropolitan network," the source said. The company declined to comment.

Optical networking has remained one of the few hot sectors on Wall Street amid a retreat in technology stocks.

Mike Volpi, head of acquisitions at Cisco Systems, last week listed optical networking as his company's most important new area of expansion. And a weak IPO market is expected to get a rare boost this week with the arrival of ONI Systems, an optical company that has raised the indicated price of its offering from Dollars 14-Dollars 16 a share to Dollars 21-Dollars 23.

The Chromatis deal marks a big achievement for Israel's rapidly growing venture capital industry and high-technology start-up sector. Israeli venture capitalists and engineers played a key role in nurturing Chromatis, which has most of its research and development expertise in Tel Aviv.

Virginia-based Chromatis was founded by a group of US entrepreneurs who recruited a team of Israeli engineers. About 100 of the company's 160 employees are in Israel.

Jerusalem Venture Partners (JVP), an Israel-based venture capital fund, was the lead investor in Chromatis. The group manages about Dollars 250m in three funds, and is backed by investors including Boeing, Invesco, Merrill Lynch and France Telecom.

JVP holds 15 per cent of Chromatis, which raised Dollars 50m in two rounds of private financing, and the deal will be the most successful investment placed by an Israeli venture capital fund. The fund took part in the seed round of financing and then assembled an international group of investors for its second round last November.

Other investors in the group include Crosspoint Venture Partners, Soros Private Equity Partners, Chase Capital Partners, ComVentures and Lucent Venture Partners.