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Technology Stocks : BAY Ntwks (under House)
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To: Mang Cheng who wrote (6646)6/18/1998 1:45:00 AM
From: Greg Jenkins  Read Replies (1) of 6980
 
The following is from AG Edwards:

Recent Development:
(06/15/98) Northern Telecom agrees to Buy Bay Networks
This morning Bay and NT announced a definitive merger agreement through which
Nortel will acquire Bay Networks. The value of the deal is $9.1 billion based
on Friday's closing prices. Each Bay share will be exchanged for 0.6 (fixed
number) NT shares. Please note that the price of Bay will vary based on the
share price of NT. The deal is expected to close in the third calendar
quarter and will result in a large one time charge which has not been
specified yet. NT expects the deal to be dilutive to 1998 results but
acretive in 1999. Combining our Bay model with a model for NT it would appear
that for the deal to be acretive in 1999 the combined company would have to
generate an additional $50 million in revenues and/or cost savings. We
believe that this should be easily attainable and will likely be due to
increased revenues versus cost cutting.

This deal marks the first major move of a traditional voice networking company
into the enterprise data networking market. Other companies on both the voice
and data side have talked for a number of quarters about the move to a
converged network but this merger marks the first real step in this direction.
The desire for users to communicate with anyone, at anytime and from anywhere
in the world has caused an explosion in the demand for greater bandwidth to
handle the transmission of all of this data. As a matter of fact, in the very
near-term, data traffic will surpass all voice traffic in the world.

This transition is putting the traditional voice and data networking providers
on a collision course as both try and position themselves to benefit from this
change. Both sides have made a number of smaller acquisitions in order to
test the water on how to move their business into the converged networks of
the future. In these converged networks, users will be transmitting voice,
video and data over a singe IP (language that computers on the Internet speak)
based network. This focus on IP plays into the strength of the data
networking players. However, the voice networking providers have the benefit
of building reliable networks that just don't fail.

In the NT and Bay agreement, we believe that it was in NT's best interest to
make a very large acquisition up front versus spending millions of dollars and
years of work to try and build this business from scratch. By acquiring Bay,
NT gains a foothold in the data networking space almost instantly. In this
merger there is little to no product overlap and Bay will continue to be run
as a stand alone business unit and will be the focal point for all of Nortel's
current and future data networking businesses.

We believe that this is good for Bay since the company was currently
struggling through a number of major product transitions that has materially
negatively impacted the company's results. Bay still generates 25% of its
quarterly revenues from shared media which is a rapidly declining market. We
believe that NT paid a fair price for Bay given its financial condition and
the fact that it saves NT hundreds of millions of dollars and years of time to
develop its own business to compete with the data networking providers.

For those investors who have a shorter term time horizon we would take
advantage of the run up in Bay's share price and sell positions. While we do
not have formal coverage of NT, for those who want to stay in the networking
area, we would suggest holding the shares
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