Talkin' 'Bout My Wan Connection
Sunday night, ASCEND COMMUNICATIONS (Nasdaq: ASND) announced a merger with
frame relay switch, ATM switch, and remote access products company CASCADE
COMMUNICATIONS (Nasdaq: CSCC). On a fully diluted basis, the deal is valued at $3.7
billion, or $36.40 per Cascade share as of Thursday's close and will involve a trade of 0.7 shares
of Ascend for each Cascade share. Ascend shareholders felt a little differently this morning,
though, as they dumped the shares for a $11 1/4 loss to $40 3/4.
The combined company will take the Ascend name and retain Ascend's CEO, Mory Ejabat.
With little overlap, except in carrier-class remote access products, they will
".deliver...best-of-breed technology in four key areas: Access Switching and Concentration, IP
Switching, Backbone Switching, and Access Products," according to Ejabat. In a recent
interview with Red Herring, FORE SYSTEMS (Nasdaq: FORE) CEO Eric Cooper
commented on Internet direction: "We think ATM switches in the core with frame relay
concentration around the edge is going to be a new paradigm." This paradigm points to Cascade's
strengths. The deal will make Ascend an end-to-end wide area network (WAN) original
equipment manufacturer, a distinction only CISCO SYSTEMS (Nasdaq: CSCO) could claim
previously. The combined product lines and financial strength of Ascend will not only present a
significant threat to Cisco, but also to the new 3COM (Nasdaq: COMS) in the area of remote
access concentrators for Internet Service Providers. NEWBRIDGE NETWORKS (NYSE:
NN), which analysts believe Ascend considered for the deal because of its valuation and product
line, will also face this stronger competitor.
Cascade pre-announced first quarter revenues of approximately $90 million, down 18%
sequentially, but up 61% from Q1 1996. In the fourth quarter conference call, the company was
"not uncomfortable" with revenue estimates for the year and was thought to be comfortable with
quarterly estimates ranging from $0.21 to $0.23 per share. Analysts have been lowering those
estimates lately for a number of reasons. Carriers, such as WORLDCOM (Nasdaq: WCOM)
and the Baby Bells, are believed to have slowed down investment in the first quarter -- confirmed
by both Cisco and 3Com recently. Ascend filed an 8-K with the SEC early in the quarter in
which run-rate sales were virtually flat sequentially. The lumpiness, or "back-end loaded" nature
of last quarter's sales, may have also satiated demand in the opening months of the quarter.
Finally, some analysts believe that the combination has been in the works for some time and that
Cascade's sales had slowed severely due to carriers' ordering lumpiness; competition from Cisco,
Newbridge, and FORE; and possibly as new products have been held back in preparation for the
combination.
On a trailing twelve-month basis, combined sales were $924 million (including Cascade's
pre-announced Q1 sales) and earnings (before charges, principally for Ascend's acquisition of
Netstar) were $194 million. Excluding non-operating charges, the combined company would
have trailing earnings-per-share of $0.96 on 201 million shares. Putting together the numbers for
1997, the deal looks slightly dilutive for Ascend holders, with a combined 1997 earnings estimate
of $304.9 million (adjusting downward Cascade's 1997 estimate to $1.03 for the
weaker-than-expected quarter). On the new share count, Ascend's estimated EPS becomes
$1.52 and Cascade's shareholders' share of that will be $1.06. |
