Newbridge's Incorrect Bet On ATM Behind Alcatel Deal
By BEN DUMMETT
Dow Jones Newswires -- February 23, 2000
TORONTO -- What a difference 24 months make.
In the case of Newbridge Networks Corp. (NN), this relatively short period marked its transformation from an independent vendor of networking equipment to a company forced to put up a for-sale sign.
Back in 1997, Terry Matthews, Newbridge's founder, chief executive and visionary, confidently wrote to shareholders in the company's annual report: "There is no doubt that, in the next millennium, most voice, data, video and multimedia traffic will be carried on asynchronous transfer mode-based, broadband, multiservice and multi-application networks."
But only a year later, this vision proved flawed, and helped to drive one of Canada's leading technology companies into the arms of Alcatel S.A. (ALA) for about $7.1 billion in stock.
Matthews' pronouncement in 1997 "is a stunning piece of short-sightedness, in that a year later it became obviously apparent that a very decent portion of networks would be more Internet-Protocol-based than ATM, and that ATM needed to co-exist in an IP world," Paul Sagawa, analyst at Sanford C. Bernstein, said in a recent interview.
Newbridge's incorrect bet on ATM equipment underscores the risks network vendors face by failing to correctly anticipate the changing needs of their customers.
Last month, Lucent Technologies Inc. (LU) prompted a big sell-off in its stock after the big U.S. network-equipment vendor warned its first-quarter earnings would fall short of expectations, partly because it misjudged how quickly customers would adopt next-generation optical networking gear.
Alcatel Deal Suggests Newbridge Too Small To Compete
Alcatel's planned acquisition of Newbridge also highlights the growing preference of communications companies to buy their equipment from a few big vendors, instead of several smaller ones, because of the breadth of their products and financial muscle.
Newbridge can compete against Lucent, U.S.-based Cisco Systems Inc. (CSCO) and Canada's Nortel Networks Corp. (NT) for ATM contracts, but couldn't compete as easily in the fast growing markets of Internet protocols and optical networking.
Newbridge's financial track record is also inconsistent. Even though Newbridge's earnings for the third quarter ended Jan. 30, 2000 exceeded expectations, it had produced results below expectations in six of the previous 10 quarters. And the company put itself up for sale in November after issuing an earnings warnings for the second quarter.
In contrast, Lucent's earnings warning was the company's first in 16 quarters.
Newbridge's weakened state today is a far cry from the fall of 1997, when it appeared poised to become a leader in the networking industry.
Back then, Newbridge had just signed contracts with MCI Communications and British Telecommunications PLC (BTY), and appeared close to signing deals with Sprint Corp. (FON) and Sprint's Global One partners at the time - Deutsche Telekom AG (DT) and France Telecom (FTE). There were also rumors that it would sign a huge contract with AT&T Corp. (T), recalled Michael Urlocker, technology analyst at Scotia Capital.
"Newbridge came really close to the big time," said Urlocker. "But then things seemed to slip rather quickly."
Worldcom Inc. bought MCI to become MCI Worldcom (WCOM), which favored Cisco equipment. The Global One partnership, which collapsed earlier this year, couldn't unite over the use of Newbridge equipment, and Sprint, which is in the process of being acquired by MCI Worldcom, ultimately chose Cisco and Nortel as its main suppliers.
Finally, the rumored AT&T pact never materialized, Urlocker said.
IP Strategy Came Months Later Than Firm Projected
Newbridge ultimately did introduce an IP strategy in August 1999, which focused on high-speed data-network gear that works at the edge of the network. However, the plan came six months later than originally projected.
Newbridge was also late to market with its next-generation 50 gigabit ATM switch, which customers started testing in December. In turn, the company's ability to sell to the burgeoning new carrier market in the U.S. has been hobbled, analysts said.
Newbridge announced earlier Wednesday that ATM sales showed strong growth in the third quarter and sales in the U.S. were particularly encouraging. However, in the second quarter, Newbridge reported damaging news of a drop in quarterly sequential ATM sales, because of a lack of success in the U.S. market.
Duncan Stewart, portfolio manager at Tera Capital Corp., said in a recent interview that he started to realize the potential of IP technology in 1997, while attending industry conferences.
Why then didn't Matthews and his executive team also pick up the same signs back then?
"They looked and saw a pot of gold and it was so close that they started to ignore rival technologies that were still quite small, like IP," figures Urlocker, the Scotia Capital analyst.
Urlocker said he was told five years ago and again last week by a now former Newbridge employee: "The greatest asset Newbridge has, and the greatest weakness Newbridge has, is Terry Matthews."
Matthews won't be an employee of Newbridge as a result of the Alcatel deal. However, in a conference call with analysts Wednesday, Serge Tchuruk, Alcatel's chief executive, suggested he would be willing to listen to any advice Matthews had.
There was also plenty of evidence to suggest Newbridge management was preoccupied with trying to fix a number of blunders and didn't notice the development of new trends soon enough. The blunders include Newbridge's ill-fated acquisition of Ungermann-Bass Networks Inc. in January 1997 and the early 1999 order-intake problems, which largely caused the company's profit warning in the fourth quarter ended April 30, 1999.
-Ben Dummett, Dow Jones Newswires; 416-306-2024;
ben.dummett@dowjones.com
|
