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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Ascend Acquires Stratus
Ascend Communications (Nasdaq: ASND) ticked down another $17/32 to $43 15/16 this morning after taking a shave of a more than $8 per share last week in the midst of rumors suggesting the company would acquire fault-tolerant computer systems and software company Stratus Computer (NYSE: SRA). Unlike all the other rumors that have involved Ascend over the last year, this was turned out to be true -- and it doesn't even involve Lucent (NYSE: LU) as a potential acquirer, either. In fact, Lucent will be even more squarely in Ascend's sights now. This morning Ascend announced that it has reached a definitive agreement to acquire Stratus by exchanging 0.75 of its shares of each Stratus share, valuing the Marlboro, Massachusetts-based company at $822 million. After considering excess cash and securities of approximately $150 million, the value of the transaction is substantially smaller than the sticker price, though.
Ascend is interested in the company's telecom software and fault-tolerant hardware assets, not the enterprise server and software units. Those non-telecom units will be divested, according to Ascend, which may bring in some cash, but the important thing is to get rid of value-neutral or value-destroying businesses. Ascend thus believes the acquisition will be accretive to 1999 earnings, currently estimated at $1.50 per share according to I/B/E/S. With this acquisition, Ascend adds another product that Lucent would love to have -- a high-density remote access switch that can comb data from voice, offloading data onto a lower-cost Internet protocol network and unburdening switched voice networks.
This is the reason why the talk of Lucent taking out Ascend last year wasn't totally off base, as switch congestion on Lucent's flagship Class 5 ESS switches is still an issue. Rather than deploying more and more of these switches, Baby Bells, competitive local exchange carriers, and even Internet service providers (ISPs) will be able to order a switching solution that can more cost effectively accommodate a mix of dial-up voice and data, T-1, T-3, ISDN, and other edge-of-network connections. Further, Ascend offers the full complement of backbone switching hardware and software.
This deal means that Ascend can offer a wider complement of network components that carriers need, which should scare Lucent, Northern Telecom (NYSE: NT), and Cisco (Nasdaq: CSCO). That Ascend shares were down this morning is surprising. It's not giving away a huge chunk of its equity to do the deal, especially considering the excess cash and the planned divestitures. It will also have a wider product line that improves its strategic position in carrier-class switching. Finally, the company has the capital allocation sense to get rid of something that isn't going to add value. It appears as though Ascend is going to have to work to educate investors on what the transaction can mean to the company. With memories of the Cascade merger still fresh in some people's minds, the nonplussed reaction this morning maybe isn't so surprising. This deal looks like a win for the company for the long term and from the outset of the deal.
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