thestreet.com. A Buyout Offers Bay a Way Out [ASND reference]
thestreet.com
By Kevin Petrie
Staff Reporter
5/13/98 4:42 PM ET
It's not just the arbs who hope Bay Networks
(BAY:NYSE) is for sale -- some on Wall Street say it's
Bay's best hope.
Sell-side analysts and investors are scratching their
heads about what Bay executives actually said about
takeover talks early Tuesday at a trade show in Las
Vegas. Some people who attended the meeting say Bay
executives didn't say the company had turned down an
offer from Northern Telecom (NT:NYSE). Bloomberg
reported early Wednesday that Bay told analysts just
that, but that it would consider other offers.
Bay's stock reacted to the news, soaring 3 15/16 to 27
15/16 on heavy volume by late afternoon.
Wall Street's consensus is that it selling is Bay's only
way out. Otherwise, it will remain mired in the computer
networking industry's second tier. The attraction is that
Bay offers a way into the data networking market for
corporations.
That's a far cry from the optimism that greeted CEO Dave
House, an alumnus of Intel (INTC:Nasdaq), when he took
over Bay in October 1996. House swiftly patched Bay's
open sores by stanching the brain drain, clearing R&D
clutter and getting a few strong products out the door.
Operating profits started to rebound last spring, and
investors pushed up Bay's stock 160% from late April to
mid-October.
The press gushed. A Business Week story said in
headlining a story, "Mr. House Finds His Fixer-Upper."
But sales slowed early this year, across the product line,
and price competition gouged profits. In an interview early
February, House seemed tired as he voiced caution about
the quarter's outlook. Today, the turnaround is on the
rocks, as evidenced by the past quarter's poor profits.
So as an exit strategy Bay reportedly wants to sell itself
for 32 to 35 a share, or more than three times trailing
revenue, according to one trader. That's still a healthy
premium after the stock's rise today. One trader said
enough arbs piled into the stock to keep the price aloft for
a few days.
"It's a perfect play for anyone who wants to become, overnight, a player in the incumbent internetworking space," says Greg Rossman, principal at Broadview Associates investment banking firm. Rossman adds that House must either execute several strong quarters, or
consider a partner. His firm advised Bay's recent
investment in NetSpeak (NSPK:Nasdaq) and its
acquisition of Xylogics in 1995; Rossman declined to say
whether he's advising Bay now.
How did Bay fall this far?
"I don't think it's fair to pin any blame on Dave House,"
says analyst Amar Senan at Volpe Brown Whelan,
which hasn't participated in any recent Bay underwriting
projects. Senan says Bay is locked in the second tier
along with 3Com (COMS:Nasdaq) and Cabletron
(CS:NYSE).
"These are companies that have succeeded in the past
because of some new hot box," Senan says. Now, "I don't
think hot boxes alone will do it." Now, Bay is unveiling
new Accelar switches for corporations, along with
products for so-called "virtual private networks" from a
recent acquisition. But what drags the company is old
baggage -- namely, so-called hubs that promise little
growth but still form a sizeable chunk of revenue. 3Com
and Cabletron, Senan says, have a similar quandary.
Now Bay hopes for an angel -- most likely a big supplier of phone gear that will acquire it to extend into data
networking for corporations.
"Bay, as a matter of elimination, is a most attractive
candidate," says a sell-side analyst who asked not to be
named. 3Com is still a little pricey, and Cabletron has lost
too much market share, he says. The analyst maintains
that Bay has gained market share, despite the recent
damage of a product transition and price competition.
(Ascend (ASND:Nasdaq) also is an attractive acquisition
candidate, though for a bidder seeking to bolster its
presence in the data market for phone carriers.)
The rumored acquirers are Lucent (LU:NYSE), Northern
Telecom, Ericsson (ERICY:Nasdaq) and Alcatel
(ALA:NYSE).
Northern Telecom, Ericsson and Alcatel each wants to beat giant Lucent. And there may be a window of opportunity for some of these companies: Lucent can't acquire a company using a pooling-of-interests transaction, the most desired method, until October, two years after it was spun off from AT&T (T:NYSE).
Officials at Lucent and Ericsson declined to comment. The others could not be reached for comment.
Lucent, which has resold Bay products in recent months, seems to some an unlikely acquirer.
"The relationship between Lucent and Bay, while still friendly, has cooled since they signed the deal," says the sell-side analyst. The companies were wary of sharing competitive information, which stifled the alliance. His firm hasn't performed underwriting for Bay.
Rossman at Broadview says Nortel boasts a strong
distribution channel for selling phone systems to
corporations; he finds Alcatel less likely because it focuses on wide-area networks rather than the small corporate systems on which Bay focuses.
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