this is not rumor control: more on the lucent-ascend courtship via thestreet.com.
Top Stories: Investors Are Betting That Ascend Is Just What Lucent Needs
By Kevin Petrie
Staff Reporter
5/13/98 10:58 AM ET
In a merger-manic environment, Wall Street is betting that
Lucent (LU:NYSE) and Ascend (ASND:Nasdaq) would
make an ideal couple.
The thinking is that Ascend would help Lucent in its pursuit
of the high-octane data networking market. Lucent mainly
serves the slow-growth phone market. Ascend, which has
rebounded after a product glitch last year, would bring both
technology and corporate customers to the table. In cases,
it also has elbowed out the dominant networker, Cisco
(CSCO:Nasdaq), in supplying phone carriers with large
boxes that channel data through the heart of their networks.
To be sure, the stock market is brimming with takeover
speculation, much of which never will occur. Even the
computer networking segment has seen its share of
takeover chatter. After two trade publications reported over
the past two weeks that Bay Networks (BAY:NYSE) was
holding talks about being acquired, the networker confirmed
to analysts that it rejected an offer from Northern Telecom
(NT:NYSE), Bloomberg reported today. The news service
said Bay was open to other offers.
Investors already have bid up Ascend in anticipation of a
deal, which could nip some of the potential premium. The
stock has had at least $5 added to its price thanks to
speculation that Lucent would pay in the low $50s per share,
according to Paul O'Neil, portfolio manager with investment
firm Knight Bain Seath & Holbrook. O'Neil wouldn't say
whether he's invested in either stock, but says he's "active"
in the group.
On Tuesday Ascend ended down 1/4 at 44 13/16, and
Lucent rose 1/16 to 73 1/16. With an $8.6 billion market
capitalization, Ascend trades at 7 times trailing revenue, and
Lucent is priced at $95 billion, or 3 times trailing revenue.
The takeover speculation has priced Ascend at more than 8
times revenue.
Ascend didn't return a call for comment. A Lucent
spokesman declined comment on Ascend, but said Lucent
intends to claim high-growth markets through internal
research and development, alliances and acquisitions.
"Ascend is a prime acquisition candidate, for Lucent
especially," says analyst Mike Cristinziano, at Gerard
Klauer Mattison, which hasn't participated in any recent
Ascend or Lucent underwriting projects. Cristinziano
considers this combination more compelling than other
scenarios because Ascend excels with phone carriers -- the
part of data networking that boasts high profit margins. It's a
natural partner for Lucent, which has long supplied phone
carriers with voice gear. Cristinziano upgraded Ascend to
buy shortly after it bounced in January; he had downgraded
Ascend on its way down in September.
Ascend knows the value of mergers. A year ago it closed
the purchase of Cascade, whose asynchronous transfer
mode, or ATM, products now are winning large contracts
with expanding carriers such as Qwest (QWST:Nasdaq).
Experts say Cascade would add another weapon to the
Lucent arsenal.
And Lucent's towering stock lends it a rich currency for deal
making -- even with a target as pricey as Ascend.
O'Neil says 3Com (COMS:Nasdaq), Bay and Cabletron
(CS:NYSE) each lack the financial clout to contemplate
ambitious acquisitions.
Unlike Cisco, Lucent has shown that it's willing to take big
bites when acquiring. In December it snapped up Livingston
Enterprises, a builder of remote-access boxes for Internet
service providers, for about $650 million in stock. A month
later Lucent shelled out shares worth around $200 million for
Prominet, which makes complex switches for corporate
networks. And just two weeks it disclosed plans to buy
Yurie Systems (YURI:Nasdaq) for $1 billion cash.
Future deals might be bigger. Lucent, a spinoff of AT&T
(T:NYSE), turns two-years old as an autonomous company
in October. At that time Lucent can enter pooling-of-interest
transactions in which two companies merge by swapping
stock and adding their balance sheets. A pooling allows a
company to avoid booking goodwill, or the difference
between the purchase price and book value, which saps
earnings over time. So bigger acquisitions become more
palatable.
One thing seems certain: If a big acquisition pushes down
Lucent's stock price, some investors will see it as a buying
opportunity. "If Lucent were to buy Ascend, I hope it would
kill Lucent's stock. I would buy a bunch of it," says money
manager Daniel McKelvey, at Forte Capital, which already
holds a long-term stake in Lucent. Forte doesn't own
Ascend.
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