Telecom Gear Companies Dial For Merger Partners
Date: 6/8/98
Author: Reinhardt Krause
As phone companies reinvent communications networks, telecom equipment makers are merging to
stockpile key technologies.
On Thursday, France's Alcatel Alsthom SA said it would buy DSC Communications Corp. for $4.4
billion in stock. One day earlier, Tellabs Inc. said it would acquire Ciena Corp. for $6.9 billion in stock.
Carriers are spending billions to upgrade analog phone networks so that they can handle digital traffic.
This includes the Internet and video, and it means huge sales for some gear makers.
Weaker players among equipment makers could exit the stage because of holes in their product lines or
limited geographic reach, analysts say. Alcatel, for example, is buying Plano, Texas-based DSC to
expand its business in the U.S.
''The companies that will win are moving quickly to incorporate the new technologies,'' said Paul
Johnson, an analyst at BancAmerica Robertson Stephens in New York. ''The consolidation among
telecom equipment makers will continue because of shifts in technology.''
One shift is adding new optical technology to phone networks to boost transmission capacity.
Six-year-old Ciena, of Linthicum, Md., makes systems that increase the capacity of existing fiber-optic
networks. These networks use laser light pulses to send data through glass fibers at superfast speeds.
Ciena's gear, called wavelength division multiplexers, crams more data through fiber cables by splitting
up light much like a prism.
''A company that aspires to be a player in the telecom industry of the 21st century must have as its
basis optical networking capability,'' said Michael Birck, chief executive of Lisle, Ill.-based Tellabs.
Ciena's customers include Sprint Corp. and AT&T Corp. Its stock went into a tailspin earlier this year
after WorldCom Inc. delayed orders for WDM gear.
Still, Ciena's sales rose to $142.7 million for the quarter ended May 2, up from $97.6 million in the
year-earlier period.
One reason Ciena is merging with Tellabs is to broaden its customer base, analysts say. It wants closer
ties with the regional Bell companies, which have been slow to upgrade fiber systems in local phone
markets.
Ciena also faces tough foes in Lucent Technologies Inc. and Alcatel, which both sell WDM
equipment.
Tellabs, started in 1975, could be a good partner for Ciena, analysts say.
''Ciena is merging with a company whose expertise is in managing bandwidth,'' said Matthew
Steinberg, an analyst at market researcher Ryan, Hankin, Kent Inc. in San Francisco. ''There's a lot of
possible synergy.''
He cites Tellab's fast-growing business overseas as an example. Ciena and Tellabs also will save costs
by combining research and development.
Tellabs makes digital crossconnects -software-based switches that direct voice and data traffic over
telephone networks. Tellabs had sales of about $1.2 billion in '97, while Ciena tallied $373.8 million in
the fiscal year ended Oct. 31.
Analysts say other equipment suppliers may have been interested in buying Ciena.
They point to San Jose, Calif.-based Cisco Systems Inc. The largest maker of computer data
networking gear is seeking more business from phone companies. Cisco's large data switches help
phone companies upgrade their aging networks to carry more Internet and video traffic.
Sprint recently chose Cisco as the primary supplier of gear for an advanced network it's building.
Cisco and Ciena forged a marketing relationship in April. The two companies also have cooperated in
setting industry standards for emerging optical networks.
Analysts say Cisco might look to buy the merged Tellabs-Ciena.
''One could make a case that the combined Tellabs company is that much more attractive to Cisco,''
said Steven Levy, an analyst at Salomon Smith Barney in New York.
Even merged, Tellabs and Ciena face hurdles competing against much bigger rivals, analysts say.
Murray Hill, N.J.-based Lucent, spun off from AT&T in 1996, racked up $26.4 billion in sales last
year.
Cisco and traditional phone system suppliers such as Lucent, Northern Telecom Ltd. and Alcatel are
locked in a fierce battle to win contracts from phone companies as voice and data networks merge.
Lucent is on a torrid acquisition spree. In late April, it bought Yurie Systems Inc. for about $1 billion.
Landover, Md.-based Yurie makes high-speed data switches that carry voice, data and video over the
same network.
Last year, Lucent bought two other data networking firms, Prominet Corp. of Marlboro, Mass., and
Livingston Enterprises Inc. of Pleasanton, Calif.
It might be even more active. As a condition of its AT&T spin-off, Lucent has been barred from using
a low-tax merger method called pooling of interests. But that restriction ends Sept. 30. Analysts say it
may then target bigger acquisitions, such as Cisco rival Ascend Communications Inc.
Lucent's also had an eye on Cisco-Ascend rival Bay Networks Inc. It was Nortel that recently made
an unsuccessful bid to buy Bay, analysts say. But the comments of a Lucent executive indicate the
company isn't out of the hunt.
Both Ascend and Bay have strong points, says William O'Shea, Lucent's group president, data
networking systems.
''Ascend is very strong in the carrier space, with . . . switching,'' he said. ''For service providers,
Ascend would be a very positive addition to our portfolio. For large enterprise network customers, Bay
is a strong fit.''
In any case, O'Shea says Lucent could well be active soon. ''We're looking to improve our hand as we
go forward, and clearly that'll be easier after Oct. 1 than today,'' he said.
At the same time, European telecom firms are seeking beachheads in the U.S. Sweden's L.M.
Ericsson Telephone Co. in May said it's exploring possible U.S. acquisitions.
Alcatel struck first with its bid for DSC, which has struggled of late. DSC reported an operating loss of
$41.3 million for the quarter ended March 31.
DSC makes high-speed digital switching and network management systems similar to Tellabs' gear.
Those are areas Alcatel wants to boost, analysts say.
''There were a number of companies looking at DSC that may have benefited from (buying) pieces of
it, but Alcatel made the best overall fit,'' said Gregory Geiling, an analyst with J.P. Morgan in New
York.
(C) Copyright 1998 Investors Business Daily, Inc.
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