Investor Presses Meru Networks For A Sale, Says Company Is 'Hopelessly Subscale'

A Meru Networks investor is pressing the Sunnyvale, Calif.-based wireless vendor to pursue a sale of the company, saying in an open letter this week that Meru can't keep up with WLAN competitors like Ruckus and Aerohive and appears "hopelessly subscale."

"Over the past few months, we have communicated privately to Meru's management and Board our concerns about the Company's consistently weak operating performance," wrote investment firm Castle Union Partners, L.P., in an open letter to fellow Meru shareholders this week.

"Among the various concerns we have articulated to the Board include Meru's long history of underperformance relative to its enterprise WLAN peers and the hopelessly subscale nature of Meru's business," the letter continued. "We have also explained to the Board the potential for significant shareholder value creation through a sale of the Company."

[Related: Meru Touts First 802.11ac Access Point As Industry's Fastest ]

Castle Union, which holds a 5.7 percent share in Meru, also said in the letter that it plans to withhold its votes for all Meru director nominees, with the exception of new independent board directors Eric Singer and Stephen Domenik, at Meru's May 22 annual shareholder meeting to further "express its disappointment over the Board's continued failure to maximize shareholder value."

A Meru spokesperson declined CRN's request for comment, citing "Meru's policy not to comment in response to open letters from its investors."

In its first fiscal quarter, ending March 31, 2014, Meru reported revenue of $20.6 million, down 16.7 percent year-over-year. The company also reported a net loss of $8.1 million for the three-month period, compared to a net loss of $3.6 million for the same period last year.

Meru, which went public in 2010, said in its earnings release that it expects its new 802.11ac wireless access points to reposition the company for growth as it moves in the second half of the year. According to Castle Union, however, "the chasm to significant profitability is too wide" for Meru to cross.

The investment firm called the gap between Meru and competitors like Ruckus Wireless, Aruba Networks and Aerohive Networks "startling." Ruckus, for its part, has seen quarterly revenue grow from $21.3 million to $75 million over the past three years, Castle Union said, making it now 3.75 times the size of Meru.

Meru, like most wireless LAN vendors, has been steadily building a portfolio of access points to support the next-generation 802.11ac wireless standard, which promises big bandwidth improvements over the former generation 802.11n standard and makes it better suited for BYOD.

But an executive at one Meru Networks partner, who asked not to be named, said Meru's investments in 802.11ac seem to fall short when compared to those made by its rivals.

"Meru had not made the same significant 802.11ac design enhancements we had seen from others, like Ruckus and Aruba," said the partner. "They've also had significant employee turnover with senior management, and line-level and sales in previous years."

In addition to wireless gear, Meru also offers a portfolio of network management software.

Castle Union said in the letter that there's "no doubt" Meru has a strong product line, making it a solid target for an acquisition.

"Fortunately, there are other companies with the infrastructure to realize substantial cost and revenue synergies from a Meru acquisition and thus put Meru's assets to better use," the investment firm said.

Gary Berzack, CTO and COO of eTribeca, a New York-based solution provider specializing in wireless, noted that Meru remains one of the most "iconic brands" in the wireless industry today. He said what really sets Meru apart is a unique single channel wireless architecture found in its access points.

"The advent of 802.11ac and Meru's single-channel architecture has a lot of possible benefits in various kinds of implementations," Berzack told CRN. "It would be sad to lose that intellectual property if it was absorbed into another organization and then not have it used well."

As of press time, Meru shares were up 1.07 percent to $3.79.

PUBLISHED MAY 9, 2014