Nortel buys Bay for $9 billion [with analysts comments]
By Randy Weston
Staff Writer, CNET NEWS.COM
June 15, 1998, 11:10 a.m. ET
Canadian telecommunications firm Nortel is adding internetworking company Bay
Networks to its portfolio for the sum of $9.1 billion.
The announcement this morning Nortel was making a bid for
the struggling Bay was not entirely unexpected. Santa Clara,
California-based Bay has fought to hold on in a market
dominated by giant Cisco Systems.
Rumors have been tossed around the past week that a deal
was imminent for Bay to be bought by some
telecommunications player as voice and data networking
converge into a single market.
Analysts also said the acquisition is sure to launch a wave of
mergers between telecommunication equipment companies
and data networking equipment makers as the two sides
consolidate to fight for the same territory.
"Bay was not survivable as a standalone company," said Tom
Nolle, president of the Cimi Corporation, a Voorhees,
N.J.-based consultancy. "In today's service market you have
to be a big carrier provider to have the margins to survive.
Bay was not quite big enough to be a full service company
and too big to be a niche player. Someone acquiring it was a done deal."
Under the terms of the deal, Bay Networks will continue to operate as a wholly-owned
subsidiary of Toronto, Canada-based Nortel. Bay Networks shareholders will receive
a fixed ratio of .60 of a Nortel common share for each share of Bay Networks'
common stock. Nortel executives expect to issue approximately 134 million common
shares. Based on Friday's closing price of $63.69 per share of Nortel stock, this
translates to $38.21 per share of Bay Networks and $9.1 billion for the entire
transaction, on a fully diluted basis.
On the closing of the transaction, Bay Networks shareholders will own approximately
21 percent of Nortel. The boards of directors of the two companies have approved the
transaction.
Nortel's enterprise data networks business will be integrated with Bay Networks'
operations. John Roth, currently president and chief executive officer of Nortel, will
remain chief executive officer and a director of the corporation. Dave House, chairman,
chief executive officer and president of Bay Networks, will become president of Nortel
and be appointed to Nortel's board.
The transaction, which is expected to close late in the third quarter of 1998, pending
stockholder and regulatory approval which just may give one other player a chance to
move in on Nortel's bid.
Nolle said Bay has a long standing reseller agreement and partnership with Nortel chief
rival Lucent Technologies. Bay provided Lucent with the necessary data networking
equipment that Lucent needs to compete in the full service internetworking market. If
Bay's deal with Nortel goes through, Nolle said it will force Lucent to make a move of
its own for one of the data networking companies to round out its product line.
"Lucent is a much better match," Nolle said. "Bay was a big player in rounding out
Lucent's product offering. Lucent will now have to look to an acquistion this fall."
Those choices include Cabletron which Nolle said was not a great match for Lucent,
Cisco which is likely too big for Lucent to buy, or Xylan which Nolle said is likely not
for sale.
But unfortunately for Lucent, it can't make any purchases until the fall because of rules
put in place on its accounting practices when it was divested from AT&T two years
ago. Under the federal rules. Lucent will not be able to pool its assets as needed for
such a purchase until the fall. If it can stall the Nortel and Bay deal until that time or
dodge some of the accounting rules, it could get Nortel into a bidding war for Bay.
"The $9.1 billion Nortel is paying is a little on the light site," Nolle said. "I think they
could have gotten a better deal with Lucent."
Nolle said Bay could have gone for between 38 cents and 41 cents more than trading
price per share instead of the 21 cents per share Nortel is offering.
"Couple of curious things to the way this came down," Nolle said. "One is Bay knew
very well what Lucent's asset pooling situation was. To jump into a deal with Nortel
when it couldn't get a counter bid from Lucent means either Nortel was looking at
someone else and told Bay to put up or shut or Bay believes Lucent will be able to do
an accounting dodge and make a counter offer."
Either way, Nolle said today's news should make for an interesting summer in the
telecommunications and data networking markets. |
