The following is an interesting Nortel article from the Bloomberg service, a success story:
Nortel, Acquiring Bay, Goes From `Laggard to Leader'
(Update2)
Nortel, Acquiring Bay, Goes From `Laggard to Leader' (Update2)
(Updates shares in 5th paragraph).
Brampton, Ontario, Oct. 20 (Bloomberg) -- It's taken a year for Nortel Networks
Corp. to show that buying Bay Networks Inc. for US$6.9 billion wasn't so dumb.
North America's No. 2 maker of phone equipment was confident that acquiring
Bay would speed its entry into the fast-growing market for Internet gear. Investors
thought Nortel was overpaying for a networking has-been.
Nortel's stock price dropped 30 percent in the three months after it unveiled the
acquisition on June 15, 1998. By October of last year, Nortel had warned that
second-half sales could be disappointing, and was trading at its lowest point since
1996. ``It was pretty much hated at that point,' said Claude King, who manages C$3
billion (US$2 billion) in stocks, including Nortel, for CT Investment Management
Group in Toronto.
This year, Nortel shares have more than doubled on rising sales of its profitable
fiber-optic equipment and optimism that Bay is proving a wise purchase.
Brampton, Ontario-based Nortel last month became the first company in Canada
to reach a market value of C$100 billion.
Lucent Technologies Inc., the biggest phone-equipment maker, has gained only
4.2 percent this year. Nortel also is outpacing the 45 percent rise at Cisco Systems
Inc., the No. 1 maker of Internet gear. Nortel rose 2 to 52 1/4 at midday.
Data Networks
Bay is helping Nortel reinvent itself. Since the acquisition, Nortel, which gets a fifth
of its sales from switches that direct telephone calls, has unveiled equipment that
gives it a full line of products to build data networks. That's important to phone
companies, which see the Internet as the network of the future for all
telecommunications. ``Nortel has gone from a laggard to a leader,' said portfolio
manager Paul Meeks, who holds US$24 million in Nortel stock as part of the
US$1.9 billion he runs for Merrill Lynch Asset Management.
Bay gave Nortel an entry into data networking, a market where it competed with
Cisco and 3Com Corp. to sell routers, modems and other gear for linking
computers.
Nortel also gained engineers familiar with Internet Protocol, or IP, the standard way
of packaging data for speedy transmission on the global network.
Those new Internet credentials helped Nortel win US$560 million in contracts from
Prism Communications Services Inc. and Net-tel Communications Inc., as well as
British Telecommunications Plc, analysts said. Nortel will supply them with
equipment for networks that run calls over the Net. ``Nortel had to develop new
technology, and there's no way it could have done so internally,' said John
Barnicle, chief operating officer at Focal Communications Corp., a Chicago-based
phone company that's buying US$75 million of equipment from Nortel. ``Bay gave
Nortel what it needed.'
Initial Skepticism
Investors balked at first when Nortel said it planned to pay US$9.1 billion in stock
for Bay, with headquarters in Santa Clara, California, just down the street from Intel
Corp.. They worried how a company anchored in the Toronto outskirts would mesh
with one steeped in Silicon Valley culture.
The price tag eventually fell to US$6.9 billion as Nortel stock tumbled. ``Bay was a
great deal,' said Charles DiSanza, a Gerard Klauer Mattison & Co. analyst who
rates Nortel a ``buy.'
Nortel paid three times Bay's sales in the four quarters before the acquisition was
unveiled. By comparison, Lucent paid a 17-times multiple for Ascend
Communications Inc. when it bought the networking-equipment maker for US$25.2
billion in June.
One drawback so far is the slow growth of corporate sales, many of which are from
Bay. Sales to companies such as Domino's Pizza Inc. and Administaff Inc. rose by
less than 10 percent in the second quarter, while sales of all Nortel equipment
climbed 13 percent from the year-ago period.
Reviving Sales
``Bay isn't contributing all that much to revenues,' said Patrick Houghton, an
analyst at Sutro & Co., who rates Nortel a ``strong buy.'
This week, the company moved to revive those flagging sales, agreeing to pay
US$2.1 billion in stock to buy Clarify Inc., a San Jose, California-based software
maker with revenue growth of 80 percent a year. Nortel, in its second-largest
purchase, plans to add Clarify software to its networking products to help
customers do more business online.
In its more traditional businesses, Nortel faces stiffening competition. Cisco's
sales to phone companies are rising 80 percent a year, while Lucent has
expanded into foreign markets and now is close to matching the 35 percent of
sales that Nortel generates outside North America.
Still, Nortel has come a long way since it was the former equipment arm of Bell
Canada, the No. 1 phone company in Canada, much like Lucent was the
equipment business of AT&T Corp.
John Roth, Nortel's chief executive and president, said last year that the
85-year-old company would venture into cyberspace, building equipment to make
the Internet more reliable. Now he talks regularly about putting ``the Net in your
pocket ' and the ``Internet Revolution.'
New Image
Since the Bay acquisition closed in August 1998, Nortel has spent tens of million of
dollars to promote that new image. The company is now in the second phase of a
six-month-old television ad campaign, vying for airtime with Lucent and Cisco.
The makeover extends to a new name. Just as it once dropped ``Northern Electric
and Manufacturing Co.' to reflect a focus on telecommunications, the company in
April discarded ``Northern Telecom Ltd.' for something more Net-like.
Roth, 57, is promising that Nortel will help build the ``optical Internet,' a powerful
network of the future that would carry data at ultra-high speeds on fiber-optic
cables. Some analysts say he has defined his strategy more clearly than have
competitors. ``Roth deserves a lot of credit,' said Credit Suisse First Boston Corp.
analyst Jim Parmelee, who rates Nortel a ``buy.' ``He understands services and
customers.'
The focus on fiber optics is paying off. Last year, Nortel overtook Lucent as the No.
1 seller of equipment that sends information or boosts capacity on fiber and has
extended its lead since, according to RHK Inc., a market researcher. Nortel
expects to sell US$5 billion of those products in 1999, up from US$600 million four
years ago.
Big Numbers
Nortel is putting up big numbers elsewhere, too. Through the end of September,
the company had unveiled 89 contracts, 30 more than at the same time last year
and worth 54 percent more revenue, Parmelee said.
AT&T, MCI WorldCom Inc., France Telecom SA and others are testing a new
Nortel product, Succession, that improves data transmission over traditional
phone networks and may eventually contain Bay technology. Nortel expects to
sell as much as US$1 billion of Succession products in 2000. ``Nortel is a
well-oiled machine,' said Jim Kenefick, CEO of Net-tel Communications. ``Bay is
going to be a big win for customers like ourselves.'
NYSE/AMEX delayed 20 min. NASDAQ delayed 15 min.
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