The Motley Fool - By the Bay
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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
By the Bay
Bay Networks (NYSE:BAY - news) jumped $3 1/2 to $27 1/2 this morning after the company said that it has rejected a takeover offer from telecom equipment powerhouse Northern Telecom (NYSE:NT - news) . That another company would be interested in Bay's products and customers is not surprising, given that Bay's stock price performance over the last two years is not indicative of the quality of its products. According to data-heads, Bay's product quality is not an issue. What's at stake for shareholders is whether the company's management can turn that product quality into shareholder value going forward.
Sure, Bay had increased in value by about 60% (before the NorTel offer was revealed) from the depths of an 18-month depression reached in the spring of last year. With new management taking control of the company last year and product wins under its belt, especially in the local area networking ATM space and in enterprise routers, the company told its employees around this time last year to be prepared for Bay to be a $100 stock. There hasn't been a split since that time, though, so the company is about $75 short of that target. Consequently, the news about NorTel isn't just a rumor, it's a pretty good indication that the company is being shopped and will be sold if the price is right.
When it comes to technology companies, it's not always the technology that dictates growth in shareholder value. Sure, Cisco Systems (Nasdaq:CSCO - news) can come along and acquire a company with great technology and no revenues for $300 million in Cisco stock, but for a large-cap company, it's no longer the technology alone that dictates shareholder value. It's how well the company executes, which can be things like management skill and how well employees are motivated. For a huge company, NorTel has generated a very respectable return to its shareholders of better than 18% per year over the last seven years. If it can cough up another billion dollars or two for Bay shareholders and fill out a giant hole in its data networking product line, where now it's pretty much an integrator of other companies' products, Bay Networks won't be long for this world as a separate publicly traded company. |
