Zhone Technologies announced today that it will acquire Paradyne Networks in an all-stock transaction. Under the terms of the deal, Zhone will issue 1.0972 shares of Zhone stock for each outstanding share of Paradyne common stock. After completion of the merger, Paradyne stockholders will own about 36.8% of the combined company while Zhone shareholders will own the other 63.2%.

The acquisition gives Zhone a vendor that has been one of the pioneers in the DSL, but more recently has focused much of its efforts on the independent telco market, which also is where Zhone has had some of its greatest traction. Perhaps just as important, the acquisition gives Zhone a better cash position. At the end of the first quarter, Paradyne reported having cash on hand of $42.2 million while Zhone reported slightly more than $61 million. After closing, which the two companies are hoping to complete by the end of September, the combined company will have gross cash of about $90 million and $50 million to $55 million in debt, said Zhone Chairman and CEO Mory Ejabat.

The merger also brings together two companies that have generally been becoming more active in the M&A market. Almost exactly one year ago, Paradyne acquired Net to Net Technologies, bringing a small form factor DSLAM into its product line as well as some early expertise in the telco TV market. Zhone has made more than a dozen acquisitions over the last several years, most recently buying metro optical vendor Sorrento.

The two companies, however, have very little overlap in terms of customers, Ejabat said. Paradyne has been very strong in IOCs and some CLECs while Zhone has targeted different IOCs, he said. Additionally, the international markets where the two companies have gained traction are different.

"We would really be able to cover the six continents," Ejabat said. "Surprisingly enough when we looked at their customer base and our customer base, there wasn't that much overlap even in the U.S."

Sean Belanger, chairman and CEO of Paradyne, said the company was not actively shopping itself around, but was approached by Ejabat.

"It was certainly Zhone approaching Paradyne," he said in a conference call today. "In the process of us becoming more interested, we went around and solicited other interest from about six different companies. The Zhone interest remained the strongest and we felt it was the best thing for our shareholders."

Going forward, the company will support the Paradyne DSLAM/BLC line, though eventually the core technology will be blended into Zhone's Multi-Service Access Platform. Additionally, Zhone plans to divest Paradyne's non-core narrowband products.

"As we go forward we would add all the functionality of Paradyne, especially around Reach DSL and T1 over g.SHDSL in the MALC platform," Ejabat said.