From briefing.com
Alteon WebSystems (ATON) 128 -15: Consolidation in the networking sector rages on. Nortel (NT 74 1/4 -4 1/4) agreed to acquire Alteon for $143.77/share in stock, based on yesterday's NT closing price of 78 1/2, but that price is already down to $136 due to NT's decline this morning. There was no premium here, but note that ATON has had a huge run in recent weeks after hitting a low of $43.50 on May 25. We have written about ATON and the intelligent networking business several times recently, as this business has been exceptionally strong (Alteon posted sequential revenue growth of 82% in Q2). Alteon makes Layer 4-7 switches, which is referred to as "intelligent" or "content-aware" networking. These switches have become a key component of Internet data centers, whether they are purchased directly by enterprises or by colocation providers who offer outsourced solutions to businesses. Growth in this business is tracking growth in the Internet, which is to say that it has been explosive. One direct competitor of Alteon was ArrowPoint, which was snapped up by Cisco in May for $5.7 bln. The two leaders will thus join the two networking giants -- CSCO and NT. The remaining pure plays are F5 (FFIV) and Radware (RDWR). While stocks of these companies traded up in sympathy with ATON this morning, they are now fading, and rightly so in our view. These two companies were already lagging behind ArrowPoint and Alteon -- now that those two leaders have the marketing and sales muscle of Cisco and Nortel behind them, it is hard to see how this helps F5 and Radware. They are only valuable now as potential takeover plays, and it's not clear who is left to acquire these companies. Extreme (EXTR) and Foundry (FDRY) are specialists in Layer 3 switching and are both moving into Layer 4-7 switching, so it's conceivable that either could be an acquirer, but it's more likely that they will continue to build their technology through internal R&D. As such, they will only add to the competition in the Layer 4-7 space, and they too have larger sales organizations than F5 or Radware. Unlike many acquisitions that give a lift to entire sectors, NT's buy of Alteon does not appear to be good news for others in this group. The fact that there was no premium and, more importantly, the reality that competition in this space is now far more intense should be cautionary news for F5 and Radware. |
