One day later, Nortel pulls off major takeover
Failed Corning deal gives way to $7.8B purchase of San Jose firm
Bert Hill
The Ottawa Citizen, with files from Citizen Wire Services
July 29, 2000
Nortel Networks Corp. pulled off its biggest deal ever yesterday with a $7.8-billion takeover of Alteon WebSystems Inc. for technology designed to maximize the profitability of electronic commerce on the Web.
The deal puts Nortel into the race with Cisco Systems for a switching product expected to generate billions of dollars in future business.
The Alteon deal could also distract investors from the embarrassment suffered earlier this week when Corning Inc. abruptly ended negotiations to pay about $100 billion for Nortel's fibre-optic component business.
Alteon, based in San Jose, California, became a focus of takeover speculation when Cisco bought rival ArrowPoint Communications Inc. in May for $4.7 billion.
Nortel said Alteon will provide a stronger and more flexible product than ArrowPoint.
But John Nguyen of Wit SoundView, a market analyst company which follows Nortel, said Alteon and ArrowPoint are comparable properties.
"We think that Nortel's acquisition will be very positive. It moves them into an emerging switching product that provides phenomenal opportunities."
International Data Corp. has predicted the market for "content-aware" switching will grow to more than $4 billion U.S. by 2004 from $203 million U.S. last year.
The Alteon product will let telephone companies and service providers make decisions about what Web traffic gets top priority by maintaining a profile of customers.
That means, for example, a customer buying a first-class airline ticket will be whisked out of the collector lanes of the Web ahead of surfers looking for the cheapest seat-sale price.
"This really allows people to put profit back into the Internet and provide platinum, gold and bronze-level service to users.
"And this is what the new economy is really about," said Nortel's chief operating officer Clarence Chandran.
Alteon quadrupled sales in the last 12 months to $109.6 million, with $51 million in the fourth quarter alone. Sales of its Web switches rose 90 per cent in the recent period from the previous quarter.
The company had a profit of $7.4 million, or 16 cents a share, in the most recent quarter.
Nortel will pay 1.83 shares for each Alteon share. That values Alteon at $143.77 a share, only slightly above Thursday's close of $143.
Alteon shares tumbled $13 5Ú8, or 9.5 per cent, to $129 3Ú8 in late trading. However, they are still six times higher than the original issue price last September. Nortel fell $5 1Ú2 to $73 in U.S. trading as technology shares took a beating.
While Alteon shares have risen in recent weeks on takeover speculation, Nortel got the company for no premium on Thursday's closing price, a rarity in the hot takeover market.
Alteon said it decided to sell after Arrowpoint was bought because it too needed a bigger ally in making sales.
Chief Executive Dominic Orr said "There's no way Alteon alone can achieve the kind of penetration (it needs) without major delivery and service engines like Nortel has," he said. "We see a lot of upside potential in Nortel Networks stock."
The high price shows how fast takeover economics have soared in two years.
In August 1998, Nortel paid $6.9 billion for Bay Networks Inc., a company that trailed far behind Cisco but still managed to generate $2.4 billion in annual sales.
"The deal looks expensive," said Duncan Stewart, a portfolio manager at Tera Capital Corp. in Toronto. "Nortel portrays itself as a company that does everything well, and then it says they've spent nearly $8 billion on something they don't do."
Nortel tried to put the best face on the Corning mess yesterday.
Mr. Chandran said Corning executives "were really focused on independence and we were focused on speed.
"We've been an absolute leader in the space for the last couple of years. We want to ensure we have the best value in consolidation.
"If other companies can't keep up with us, we're going to buy them and build it ourselves."
The Alteon deals shows Nortel is determined not to repeat mistakes made since the Bay deal in another critical switching technology, called routers. The Bay deal was supposed to give Nortel a product that could compete with Cisco's market-leading routers, huge switches which load data on corporate networks.
But despite two years of effort, Nortel has yet to deliver a competitive product.
It implicitly acknowledged the dilemma recently when it started selling routers made by Juniper Networks, a relatively new player which has started stealing market share from Cisco.
Nortel has said the alliance is only temporary and a Nortel router is still on track and on schedule. |
