Arbor Networks Acquisition Is a Tale of Two Cities—and a Strategic Move Into Wider World of Wireless

8/12/10Follow @gthuang

If Arbor Networks were a tree, its roots would be in Michigan. Its branches and leaves (and some of its caretakers) would be in Massachusetts. And its proud new owners would be in Texas and Washington, DC—with a lot to live up to.

Earlier this week, Chelmsford, MA-based Arbor Networks, a maker of software for network security and management, said it is being acquired by Texas-based Tektronix Communications, which is owned by Danaher (NYSE: DHR), the technology conglomerate based in the nation’s capital. Financial terms of the deal weren’t disclosed, and at least at first the principals at Arbor and Danaher weren’t saying much beyond the platitudes that typically follow such a merger.

So I spoke with Arbor’s co-founder and chairman, Farnam Jahanian, and the company’s CEO, Colin Doherty, to hear about what the deal really means for Arbor, and to learn more about the company’s 10-year history. As I found out, its story is a pretty compelling case study of a university spinoff that got venture funding, got profitable fast, survived two recessions and a brutally competitive landscape, and emerged on the other side in a stronger position.

First, a few practicalities about the merger. Arbor will stay “whole and intact as an operating unit under the Danaher brand,” says Doherty. The company has 275 employees worldwide—about 90 in the Boston area, 90 in Ann Arbor, MI, and the rest in other locales like London and Singapore. Jahanian is exiting the company, while Doherty will stay on as president of Arbor, which will become part of Danaher’s communications and enterprise group (which comprises a half-dozen companies, including Tektronix Communications, Fluke Networks, and AirMagnet).

Arbor will provide its new parent company with deep Internet security knowledge—what Doherty calls a “security beachhead.” Now “they can detect, secure, and mitigate network security. It was a really good fit for them,” he says. And now, with Danaher’s size and influence, he says, “it’s a unique opportunity for us to change our model…and be part of a larger public vehicle.”

Arbor Networks was founded in 2000 by Jahanian, who is chair of computer science and engineering at the University of Michigan, and Rob Malan, who was Jahanian’s Ph.D. student at U-M and is now Arbor’s chief technology officer (he will stay on as CTO). The company’s core technology, based on Malan’s and Jahanian’s research, involves software that monitors entire computer networks—from data centers and Internet service providers to broadband customers and mobile interfaces—and protects them against all manner of security threats, most notably, denial-of-service attacks that can shut down big networks and popular websites. (Basically, this means there’s a good chance your Internet service provider has used Arbor’s software to keep things running smoothly.)

Jahanian and Malan’s team raised a Series A venture round in 2000, led by Battery Ventures and Cisco Systems, and then a Series B round in 2002, led by Thomas Weisel Venture Partners. Those two rounds, the only outside funding taken by the company, were worth about $33 million. (Because the Danaher acquisition price hasn’t been disclosed—and Arbor’s leaders kept their poker faces on, giving me no indication of the size of the financial win—it’s hard to know yet how well the investors made out.)

In its early days, Arbor made an important decision: to put the company’s headquarters in the Boston area while keeping the core engineering team in Ann Arbor. “We knew we could build a phenomenal R&D team in Ann Arbor,” Jahanian says. “But to recruit the quality of executives [we wanted], we had to be either on the East or West Coast.” The combination of Battery Ventures being in the Boston area, the strong local business talent, and proximity to the East Coast’s big wireless carriers and Internet service providers swung the decision in Boston’s favor, he says.

Arbor worked its way deep into the market over the next few years, becoming profitable relatively quickly. It wasn’t easy. Network security, starting around 2000, was one of the most crowded and contested fields in all of IT, full of competitors like Riverbed Technology, Lancope, Mazu Networks, and Asta Networks, as well as big companies like IBM. From what I hear, it’s pretty amazing that Arbor (or anyone for that matter) survived this hostile sector. Arbor seems to have done so through deep relationships with big customers and partners like AT&T, Verizon, British Telecom, Yahoo, and Cisco.

“Protecting mission critical networks…has challenged us from day one,” Jahanian says. “When you have to work with the largest carriers in the world, and enterprises from healthcare to financial services, that pushes you to innovate.”

Other keys to survival were probably the company’s technology and the quality of its team. David Munson, the dean of engineering at the University of Michigan, calls Jahanian “a terrific entrepreneur.” He adds that the professor “was instrumental in building Arbor Networks into a premier network security provider.”

For his part, Jahanian sees the Danaher acquisition as a natural next step in Arbor’s broader evolution. “It’s another inflection point,” he says, and it will help the firm “expand into a new emerging market.”

That market is wireless and mobile. Up to this point, Arbor has been more focused on Internet service providers. But as Doherty explains, voice, data, and other communication streams (including WiMax and LTE broadband access technologies) are being woven together into an “all-Internet-protocol fabric”—and that means these streams, which used to run separately, now need a unified security system. Jahanian sees that as a “terrific opportunity for the company.”

As for Arbor’s continuing impact on the Michigan and Massachusetts innovation communities, Doherty didn’t give many specifics. But he said the company will “continue to grow our presence in Ann Arbor and in Chelmsford.” Jahanian calls Arbor Networks “a wonderful example of how the innovation economy can work when you have universities and entrepreneurs aligned behind great technology,” and how “research funded in universities can result in a powerful engine for economic growth.”

Meanwhile, U-M’s Munson says he is “heartened that the acquisition of Arbor Networks calls for Arbor’s research and development activity to remain in Ann Arbor. This is a cornerstone for Ann Arbor’s rapidly developing software and networking industry.”

Looking back, it’s certainly interesting to see that Arbor’s two-pronged geography approach was successful. We’ll see if Danaher can keep it going—and help the company achieve even wider impact.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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