Kelly Teal Blog: Why Would Profitable Metaswitch Want to Go Public?

For months now, industry rumor has held that softswitch maker Metaswitch will go public some time soon. Since Kevin DeNuccio came on as CEO earlier this year, the company itself has indicated it is planning for an IPO. The question is, why would Metaswitch, a well-run, well-funded, established and, most importantly, profitable company subject itself to Wall Street’s demands? Other than giving investors an exit or preparing for more M&A, there seem to be few answers. And even those possible reasons seem like a stretch.

Metaswitch itself won’t comment, particularly since no documents have been filed with the Securities and Exchange Commission. “Metaswitch remains focused on creating value for our customers, partners and stakeholders and looks forward to providing further updates when appropriate," the company told VON/xchange.

The IPO chatter comes as Metaswitch works to move up-market. The London-based company is trying to secure more Tier 2 and Tier 1 customers, where its largest rival, BroadSoft Corp., dominates. Observers wonder, then, whether a Metaswitch IPO would serve as a strategy to surpass unprofitable BroadSoft. The thing is, BroadSoft’s recent IPO hasn't performed spectacularly – the company priced its shares at $9, the low end of the expected range, and its shares remain under $9 – and it just reported a quarterly loss of $1.8 million. Metaswitch, unlike BroadSoft, is making money. But that doesn’t mean Wall Street would view another IP-related IPO with enthusiasm.

“I don’t see what benefit there is to Metaswitch going public," said one telecom insider, who asked not to be identified. “They’re worthy of being public because they do have the track record to justify raising money. But is that the kind of company they want to be?"

Maybe the presence of a new, Wall Street-savvy CEO helps explain the apparent push to do an IPO. In February, Metaswitch hired former Redback Networks CEO DeNuccio to replace John Lazar as CEO, who remains chairman of the Metaswitch board. DeNuccio, the source said, “has a strong corporate [sensibility] and maybe that’s why he’s there."

“Maybe management culture is getting a little more corporate and investors are saying, ‘We want our money out now.'"

Then again, maybe Metaswitch wants to do a major acquisition. The company bought AppTrigger in March, but it could be hungry for more. Of course, the question then becomes, who would it buy? There’s not a lot of competition in the space. BroadSoft and Metaswitch are “kind of like the last two standing," said the source. There’s no obvious mid- or large-size target that would require Metaswitch to raise hundreds of million dollars.

Unless, of course, Metaswitch wants to buy BroadSoft. To be sure, that would automatically give Metaswitch 20 or 30 large customers, plus allow it to go public in a reverse IPO. Given BroadSoft’s performance as a public company, that's not necessarily a recipe for success.