fantasic wsj article - a must read
The Wall Street Journal Interactive Edition -- May 13, 1998
Bay Networks Surges 17%
On Hopes for Acquisition
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Bay Networks' shares jumped 17% on renewed speculation that the data-networking company may be acquired soon.
In afternoon trading Wednesday, shares of the Santa Clara, Calif., company were up 4 to 28 on the New York Stock Exchange. Meanwhile, the Nasdaq Composite Index was up 5.80 to 1866, while Morgan Stanley's high-tech 35 index was up 6.60 to 592.40.
Bay jumped on reports in the Los Angeles Times and elsewhere that the company had rejected a takeover offer from telecommunications equipment giant Northern Telecom. Reports held that Bay said it had turned down the Nortel offer because it was too low, but it would consider other offers. News of the rejected offer drove the stock higher, as investors hoped for a higher price, possibly from another bidder.
A Bay spokeswoman said the company doesn't comment on market rumors, although she called reports about a potential merger as "basically inaccurate."
Shares in other data-networking companies had been expected to gain on the news, but by midafternoon were all posting modest losses. Cisco Systems, the largest data-networking company, was off 9/16 at 75 13/16, Ascend Communications was 1/16 lower at 44 3/4 and 3Com slipped 5/8 to 30 5/16. All trade on Nasdaq.
Speculation has long swirled around Bay that it would be a prime takeover target for a large telecom equipment company such as Nortel or its primary competitor, Lucent Technologies. Such talk was highlighted by news late last month that Lucent had agreed to buy data networker Yurie Systems for $1 billion.
Lucent Agrees to Acquire Yurie Systems for $1 Billion (April 28)
Northern Telecom to Acquire Aptis for About $290 Million (March 18)
Cabletron Agrees to Acquire Hot Gigabit Start-Up Yago (Jan. 15)
Aside from Nortel, other companies considered interested in Bay include Alcatel Alsthom, Ericsson and Siemens.
Most of the merger activity in data networking has involved bigger players buying out significantly smaller companies with new technologies, such as Nokia's purchase of Ipsilon and Lucent's acquisition of Prominet, both in December. But the size of the deals is likely to get bigger.
"The telecom-equipment companies are extremely interested, to the point of being obsessive, about purchasing data-networking companies," said Bill Rabin of J.P. Morgan Securities Inc.
The reason for that obsession, he said, is that once separate networks for carrying voice and data converge, it appears likely that the surviving architecture will be data networks. Therefore, he said, the telecom companies have a serious interest in acquiring the expertise and experience of the data-equipment companies.
He didn't know of any specific talks between Nortel and Bay, but said that "where there is smoke there is generally fire."
Bay could be a particularly attractive takeover candidate because some analysts see it as the most credible alternative to Cisco in the high-end router market. Also, its share price has been under pressure as the company has struggled with weak demand for its products.
Before Wednesday's move, shares in the company were down 42% from the 52-week high of 41 7/8 hit in October. Last month, Bay reported weaker-than-expected earnings of 10 cents a share, compared with analysts' forecasts of 12 cents, for the third quarter ended March 28. The company cited seasonality, weaker demand in the industry segments the company serves and longer purchase-decision cycles as the reasons for the earnings weakness.
Wendy Abramowitz, an analyst at Argus Research Corp., said she has a "hold" rating on Bay's stock given its recent business troubles, and would not change her rating based on takeover rumors.
An acquisition of the company "is certainly possible given the problems that Bay is going through at this time. It wouldn't be any great surprise that companies are coming up to them with lowball figures." But she believes large-scale merger activity in the data networking sector is still several years away.
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