Computer networking upstart Xylan Corp. said Tuesday it had entered a broad alliance with IBM Corp. under which Big Blue will buy at least $30 million of Calabasas-based Xylan's products, produce others under license and receive an option to purchase 5% of the company.
Xylan's switches provide a relatively low-cost method of moving data, graphics and video across computer networks, and the 3-year-old company rode the Internet boom to become one of this year's hottest initial public offerings. But since hitting a high of $76 in late May, Xylan's shares have fallen along with many other tech issues.
The company's stock dropped $11 on Friday and Monday after a disappointing earnings report, but jumped $1.50 Tuesday on word of the IBM deal to close at $36.25.
IBM will now become Xylan's biggest customer. As many as 30 IBM engineers will be sent to Calabasas to work with Xylan's staff, and Xylan will send some employees to IBM's networking division in Raleigh, N.C. Xylan spokesman Douglas Hill characterized the $30 million in products as "just the initial order" from IBM.
Analysts said the deal put Armonk, N.Y.-based IBM on the leading edge in the critically important data communications arena. The computer giant needs to provide a full range of data networking products and services for its corporate customers.
"What this deal does is provide IBM with a kind of next-generation technology," said James Wade, technology analyst with Alex. Brown & Sons.
To catch up in the fast-growing computer networking market, IBM has recently struck licensing deals with several smaller upstarts, including Cascade Communications of Westford, Mass.
According to Hill, Xylan's executives two years ago drew up a list of large companies it wanted to strike strategic partnerships with, and IBM was on the list.
Previously, Hitachi was Xylan's biggest client, accounting for about $3 million in sales, or slightly more than 10% of Xylan's revenues in its second quarter.
Xylan posted net income of $5.6 million on revenue of $51.6 million in the six months that ended June 30. The company posted its first quarterly profit in December.