<A> Consolidation Seen Among Voice,Data Cos In Networking Indus
By Joelle Tessler
NEW YORK (Dow Jones)--As the lines between voice and data communication continue to blur, many industry experts are predicting a wave of consolidation among telecommunications-equipment makers and data-networking companies.
Acquisition rumors have been sweeping the computer-networking industry for months, with just about every major networking name other than Cisco Systems Inc. (CSCO) mentioned at some point as a potential takeover target for a big telecom-equipment company.
The two industries are likely to converge in the years ahead through mergers, analysts believe, as the big voice equipment makers eye the faster-growing computer networking industry and as they try to protect their core businesses as more and more voice traffic travels over data networks.
"The [data] networking industry ... was ignored by the big
telecom-equipment companies," said Volpe Brown & Whelan Co. analyst Amar Senan. "But now data networking is big, and they can't ignore it anymore."
While the big voice equipment players are likely to develop some data networking products in house, Jeffrey Pittsburg, a partner at Goldis-Pittsburg Institutional Services, believes they will get a lot of technology through acquisitions because "it's much faster."
"It's not a question of money," Pittsburg said. "It's a question of time. ... The Internet is much bigger than they had expected. ... They don't have a long time frame to develop all of this technology."
The latest takeover rumors in the networking sector have swirled around Bay Networks Inc. (BAY). Lucent Technologies Inc. (LU), Alcatel Alsthom (ALA), Northern Telecom Ltd. (NT), L.M. Ericsson Telephone Co. (ERICY) and Siemens AG. have been named as potential suitors.
A month or two back, the rumor was that Tellabs Inc. (TLAB) would buy Fore Systems Inc. (FORE). And Ascend Communications Inc. (ASND) and Cabletron Systems Inc. (CS) have also been named as likely targets.
Industry watchers also expect to see partnerships between major players in the two businesses. For instance, while Cisco is too expensive for most would-be suitors and Northern Telecom isn't for sale since it is partly owned by the Canadian government, the industry has long suspected that the two companies could enter into some sort of major alliance, said Sanford C. Bernstein & Co. analyst Paul Sagawa.
This would in turn put pressure on Lucent to step up its push into the data networking market, Sagawa said. Lucent has been actively building up its presence in this business through internal development and acquisitions, although the company is currently prohibited from transacting pooling of interest deals because the company was spun off from AT&T Corp. (T). This two-year moratorium will expire in October, giving Lucent more flexibility to make acquisitions, he said.
"It would be a chain reaction because they want to have a level playing field," Pittsburg said.
The telecom equipment makers are interested in the data networkers in large part because they are in a much faster-growing business, analysts agreed.
Randall Yuen, an analyst with Salomon Brothers Asset Management, estimates the voice-transmission industry is growing at about 5% annually. He believes the data transmission industry, on the other hand, is growing at about 30% annually, driven by the explosive build-out of the Internet and the increasing reliance of major corporations on data networks for mission-critical operations.
"It's an aggressive move," said Lazard Freres analyst Michael Duran, explaining that the voice-equipment makers are "looking for new areas of growth."
Pittsburg, of Goldis-Pittsburg, added that the adoption of high-speed networking solutions like asymmetric digital subscriber line, or ADSL - a technology designed to dramatically speed up Internet data transmission to PC users over home phone lines - will only fuel the growth.
"People are racing to buy equipment to handle fatter, faster applications," Pittsburg agreed. "Everyone wants to be involved in the networking of this business ... Everyone wants a piece of it."
Analysts added that these companies are also looking at the data-equipment market because they want to be "total suppliers" to their customers -
providing all of the different pieces of their networks. "They want to be in as many concurrent businesses as possible because they are dealing with giants who buy a lot of stuff," Pittsburg said. "They want to be able to provide end-to-end solutions."
Duran noted that the telecom-equipment makers are eying the data players not only for their technology, but also for their customer relationships and distribution networks. Many voice players "still lack the widespread ability" to sell data equipment, Sagawa, of Sanford C. Bernstein, said, since they "don't call on the people who make the data decisions right now."
Duran stressed that the telecom-equipment companies are also very much on the defensive as they try to protect their core operations since "the data folks are starting to think they can take over the voice market." Led by Cisco, most of the major data networking companies have been aggressively developing and acquiring technology to voice over Internet Protocol and other data networks.
"We are the leader in the technologies that fuel the new world," said Larry Lang, vice president of marketing for Cisco's service provider group. "This is worrisome to companies that aren't leaders in the new world."
William O'Shea, president of Lucent's Data Networking Systems Group, explained that the entire networking industry is at a major crossroads. Until recently, he said, network traffic was dominated by voice, so network-equipment makers "built networks to do a great job with voice." When data traffic came along, it was simply added on top of voice.
But this trend is starting to reverse itself since the data-networking industry is growing so quickly. Soon, O'Shea said, "data will become the dominant traffic and voice will run on top of that." Right now, he said, with traffic split about evenly between the two, "we're at the cross-over point ... so we're seeing a lot of activity."
What is happening, Yuen explained, is that telecom networks are starting to resemble data networks more and more as they migrate from analog circuit switching technology to digitized packet switching technology.
While circuit switching functions by establishing a continuous connection between two points in a network, packet switching divides data into packets that travel over different routes and are reassembled at their destination.
"We are now seeing digitalization of voice traffic to send over packet networks," said Salomon's Yuen.
The underlying question for all of the industry players, of course, is "what will networks look like 15 years out?" said Sanford C. Bernstein's Sagawa. The answer is still up in the air, but Sagawa sees some trends starting to take shape.
The analyst expects the networks of the future to use new architecture based on optical fiber switching; wave division multiplexing, a transmission method that increases the capacity of fiber optic lines by sending and receiving light in multiple frequencies or colors and intelligent edge servers to handle application-specific network protocols.
These networks will be able to transmit many types of traffic, including voice and data, by handling each "in the way that is most appropriate to it," Sagawa explained.
And since voice will be just one small part of this, the big phone equipment companies will "have to have something else to do" - like data networking - he said.
While the vast changes sweeping the industry have led some data networking companies - notably Cisco - to buy telecom equipment makers, Volpe Brown & Whelan's Senan believes it is easier for the telco players "to move downstream" than for the data companies "to make it up the food chain."
This is in part because many telecom equipment players have critical mass and strong stocks, which give them deep pockets, he said. The networking sector, on the other hand, has been plagued by weak share prices, making acquisition targets more affordable.
Only Cisco's stock is healthy enough to give it the "tremendous currency" needed for very large purchases, Senan noted. The company's strong stock performance also makes it one of the few networking companies that may be too expensive for the telco players to afford.
The acquisition activity has already begun, led by Lucent, which has made several data networking purchases. The company bought Agile Networks, an intelligent data switching firm in October of 1996; Prominet Corp., a maker of gigabit Ethernet switching and routing products in January; and Livingston Enterprises, a remote access provider in December of 1997. And last month, it agreed to buy Yuri Systems Inc. (YURI), a provider of ATM wide area access equipment.
Likewise, Northern Telecom last month purchased Aptis Communications Inc., also a remote access company.
And Siemens, Newbridge Networks Corp. (NN) and 3Com Corp. (COMS) are in an alliance to jointly develop and market products. In late 1997, Siemens and Newbridge jointly purchased Radnet Ltd., a maker of ATM access switches.
Looking out a few years, Senan believes the data networking industry will become part of the wireline telecom equipment business. He also expects to see fewer but larger companies in a sector encompassing voice and data traffic.
The analyst believes there will be 10 to 15 main players, another 20 to 30 medium-sized players and "a whole bunch of small companies" with specialized expertise that might make attractive acquisition targets.
"It is an industry that is shrinking in number, but it will be left with bigger players," Senan said.
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