Ericsson in Talks With Ascend, Other Networking Firms
Stockholm, June 17 (Bloomberg) -- Ericsson AB, one of the world's largest phone equipment makers, is in talks to acquire Ascend Communications Inc., and other computer networking companies, a person familiar with the talks said.
Ericsson wouldn't comment on specific acquisition targets. The company ''is very interested in data networking companies,'' said Ericsson Vice President for Corporate Communications Kathy Egan. Ascend declined to comment.
The Swedish telecommunications company wants to acquire a U.S. networking company after talks with Bay Networks Inc. failed, the person said. This week Northern Telecom Ltd. agreed to buy Bay in a transaction now valued at $7 billion.
Phone equipment makers like Ericsson and Lucent Technologies Inc. are jockeying to buy companies that make equipment used to link computers to corporate networks and the Internet. While Ericsson has strong European sales, the company doesn't sell many data networking products and has a small U.S. customer base. Buying Ascend can fill both gaps.
If Ericsson is serious about data networking, buying Ascend would make sense,'' said Martin Pyykkonen, an analyst with CIBC Oppenheimer who rates Ascend ''buy.''
Alameda, California-based Ascend also is likely to draw takeover interest from Lucent, North America's largest phone- equipment maker, said Pyykkonen and other analysts.
Ascend makes the powerful computer switches phone companies use to move communications traffic between the Internet and the public telephone network. The company is expected to have sales of about $1.4 billion in 1998.
Northern agreed to buy Bay for $9.1 billion, or three times its expected annual revenues, yet Northern's stock has fallen 18 percent since the agreement was announced, shaving more than $2 billion off the price.
Higher Price
Potential suitors are likely to pay more for Ascend than Bay, which saw profits decline in its most recent quarter, analysts said.
There's no question Ascend would command a higher premium than Bay,'' said Paul Johnson, an analyst with BancAmerica Robertson Stephens who rates Ascend ''buy.''
Ascend is more likely to be bought for a multiple similar to that paid by Tellabs Inc. when it bought Ciena Corp. earlier this month for $6.86 billion, or more than 8 times Ciena's expected revenues. Applying a similar multiple to Ascend would yield a purchase price of $12.5 billion, or $61 a share.
Ascend shares rose 7/32 to 49 3/8 in regular U.S. trading. Shares traded as high as 51 3/8 after the Nasdaq close.
Ericsson has a market capitalization of $24.5 billion, more than twice the $9.52 billion capitalization of Ascend.
Ericsson had worldwide revenue of $21 billion in 1997, more than Northern's $15.4 billion and less than Lucent Technologies Inc.'s $26.3 billion. Yet only $150 million of that came from sales of data communications and Internet equipment, Egan said.
The company wants to increase that figure to $1 billion by 2000, she said. The market for Internet equipment sold to phone companies, the fastest-growing segment of the telecommunications industry, is expected to reach more than $50 billion annually by 2005, according to market researcher CIMI Corp.
On June 2, Ericsson said it was moving the headquarters of its data communications and Internet equipment unit to Boston, saying a U.S. presence would help it become a larger player in the networking industry. An Ascend subsidiary, Cascade Communications Corp., is based in Westford, Massachusetts.
3Com Discussions
3Com Corp. is among the other companies Ericsson has talked to about an acquisition, yet analysts said the No. 2 networking company after Cisco Systems Inc. doesn't have the technology Ericsson is after.
There's nothing attractive there for Ericsson,'' said Scott Heritage, an analyst with UBS Securities who rates 3Com ''hold.''
3Com has seen profits plunge 90 percent in each of the last two quarters amid competition from Cisco and slowing sales of products it acquired when it bought US Robotics Corp. last year.
The company now resells telecommunications equipment through agreements with Newbridge Networks Inc. and Siemens AG.
It's not our strategy to be acquired,'' said 3Com spokesman Bob Ingols, who declined to comment on takeover rumors, citing company policy.
Shares of Ericsson rose 1 1/16 to 27 7/16. 3Com fell 15/16 to 24 5/8.
20:04:35 06/17/1998
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