5/4/98 Schaff analysis. Lucent's Networking Splash [ASND reference]
Leading telecom equipment company continues
aggressive expansion with acquisition of ATM vendor
Yurie Systems
pubs.cmpnet.com
By William Schaff
I've written in the past about Yurie Systems Inc. (YURI), a
leading ATM access equipment vendor to telecom
carriers, Internet service providers, and enterprise users. I've
also covered Lucent Technologies (LU), the leading
telecommunications infrastructure equipment company. With
cash burning a hole in Lucent's pocket, the vendor plunked down
$1 billion for Yurie and simplified my job by merging into one
company. More important, the acquisition makes a big splash
within the networking community, since the line between
networking and telecommunications infrastructure has become
increasingly blurry.
Even before it acquired Yurie, Lucent has been aggressively
expanding its data-networking capability for WANs, LANs, and
remote-office users. For example, Lucent acquired Livingston
Enterprises late last year to help deliver integrated
remote-access solutions to ISPs and enterprise networks.
Prominet Corp., a leader in Gigabit Ethernet-scaled campus
networking technology, was acquired early this year to address
the campus backbone. Gigabit Ethernet lets network managers
deliver more bandwidth than ever to growing LANs and
high-performing desktops. With Yurie, Lucent adds a technology
leader in the ATM access market segment that focuses on the
concentration of voice, data, and multimedia traffic on top of
carrier backbones.
Most IT managers already receive both economic and
operational benefits from service providers migrating to ATM at
the core. ATM equipment costs are becoming more competitive
with time division multiplexing (TDM) and frame relay
equipment. Since the overall equipment cost is comparable,
economics are driven by operational and bandwidth costs.
ATM is more cost-efficient than either TDM or frame relay in
handling different traffic types with different priorities and service
levels. In a commoditized and competitive world, part of these
cost savings will eventually find their way into users' pockets.
Most carriers already understand the benefits to their core
backbone, but they can also see the benefits for the WAN.
Historically, frame relay switches have been used to aggregate
low-speed access lines to a router, as ATM has been overkill for
noisy, low-speed links. With Yurie's technology, ATM switches
can aggregate access circuits in a similar fashion-but at higher
bandwidths. Network operators gain a highly scalable
technology that can enable network expansion at lower cost.
Be Careful Out There
But there are more than a few risks on the horizon. First, the
economic and operational benefits of ATM on the WAN have
not been lost on the competition. Ascend, Cisco Systems, Fore
Systems, Northern Telecom, and Newbridge Networks are each
addressing this fast-growing market segment. Integration issues
with the new acquisitions within Lucent need to be addressed at
both the human-resource level-there are 240-plus people at
Yurie alone-as well as at the product level. Given Lucent's strong
technical capabilities, the bigger issue is likely to be human
resources.
At the current price for Yurie, there will undoubtedly be some
dilution to earnings in the first year of acquisition. Yet Lucent
should still be able to earn an estimated $1.95 in fiscal 1999,
ending Sept. 30, unless it makes another major acquisition in
the near future.
This is not as outlandish as it sounds. Lucent already offers data
networking solutions from Bay Networks Inc., including hubs,
switches and routers. Not surprisingly, Bay happens to be one of
the major customers for Yurie.
The lines are definitely getting fuzzier. Maybe Cisco should start
looking over its shoulder.
William Schaff is chief investment officer at Bay Isle Financial
Corp. in San Francisco, which manages the InformationWeek
100 Stock Index. You can reach him at bschaff@bayisle.com.
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