SUPPORTERS LOOK TO NEWBRIDGE FOR CLEAR DIRECTION
HOT STOCK
By Jill Vardy
Technology Reporter Financial Post
NEWBRIDGE NETWORKS CORP'S annual meeting next week may prove to be vastly different from last year's gathering of the faithful.
Newbridge executives were basking in the glow of analysts' favor in September 1997, with a stock price quickly climbing toward its peak of $95 and contract wins coming out their collective ears.
This year, the meeting will be declared a success only if management can convince shareholders and analysts that there is a firm game plan for the telecommunications company. "We're looking to see where, in this rapidly changing and consolidating telecom industry, Newbridge fits in the longer term and how sustainable a 'go it alone' strategy is for the company," says David Beck, technology analyst at TD Securities Inc.
Ask any telecommunications analyst if he has concerns about Newbridge, and you will get a list that includes, in no particular order:
* Speculation that the company is a takeover target;
*Newbridge's relationship with German telecommunications partner Siemens AG;
*Its relations with its affiliate companies;
*Its retreat into the core business of supplying equipment for large public telecommunications networks.
Add those up and it is easy to see why Newbridge stock (NNC/TSE) has been trading closer to its 52 week low of $26.75 than to its high of $95. The shares closed yesterday up .55 at $30.80.
Analysts' evaluations of Newbridge reflect the recent uncertainty surrounding the company - and the low stock price. At least 18 analysts either have "buy" or "strong buy" ratings on the stock, and another 11 have "hold" or "market perform' recommendations. One of those who rate Newbridge a "buy," BancAmerica Robertson Stephens analyst Paul Silverstein believes the company has laid credible plans for a sustainable recovery. "In the past three months we've seen Newbridge moving in the right direction in terms of customer winds, new product announcements and organizational change," Silverstein says. "There was the perception that Newbridge had fallen off the face of the Earth competitively ... but in the past three months we've seen a lot of progress."
That progress includes an overhaul of its corporate structure under the guidance of new president Alan Lutz, a cleanup of its relationship with its affiliated companies, most of which are one-third owned by Newbridge, and a retreat from its foray into the world of local area network equipment and back into its more traditional focus on the market for wide-area network telecommunications equipment. However the overriding concern for analysts is the restoration of Newbridge's reputation as a consistent earner. "That is what we're lacking in this story now," says TD's Beck, who has a target price of $50 and a "buy" rating on Newbridge stock.
In its fiscal 1999 first quarter ended Aug. 2, the company earned #36 million (.20 a share) on revenue of $426 million. That compares with the first quarter of 1998, when Newbridge earned $64 million (.37) on revenue of $335 million.
Slverstein says Newbridge is undervalued because investors have not attached any significant value to its stakes in 20-odd affiliated companies, each selling some type of telecommunications equipment or service. He estimates the collective equity interest in those companies is worth more than US$500 million. The affiliates have made more news than usual in the past few months, as Newbridge has worked on what one insider calls "tidying up" its relationship with the smaller firms. Newbridge's oldest affiliate (I think this is incorrect, it should be West End Systems "oldest affiliate" G.M.) CrossKeys Systems Corp. (CKY/TSE), completed its initial public offering late last year, the first of the affiliates to do so.
Newbridge bought up Castleton Systems Corp., a British Columbia-based original equipment maker which had fallen on tough times. It also sold its stake in Advanced Computer Communications of California for an estimated US$170 million to Swedish telecom power Ericsson AG. "That deal is a great one all round" Silverstein says. "Newbridge got a nice price for it, and it gets to maintain its reseller relationship and access to the technology."
The sale to Ericsson, and news that Ericsson will join Newbridge's carrier scale Internet working consortium and co-operate on product development, renews questions about Newbridge's two-year-old relationship with Siemens, the German telecommunications giant with which it formed a partnership to great fanfare in 1996.
"The number of times Siemens is mentioned in Newbridge press releases has dropped copiously," says Duncan Stewart, partner in Tera Capital Corp., a research firm which manages technology mutual funds. Stewart says that Newbridge's Lutz told analysts last July there were five or six things that he had to work out with Siemens, but "he hasn't told us he's solved any of them." One sticking point appears to be intellectual property feuds over jointly developed networking equipment. "When a husband and wife start arguing over who owns the china set, they're not buckling down for another 50 years of marriage," Stewart says.
That has led him to believe Newbridge may be preparing to flee the arms of Siemens for another, more suitable partner - such as U.S. based Lucent Technologies Inc. Lucent would benefit from Newbridge's strong presence in the ATM market. But if there is anything afoot between Lucent and Newbridge, the share price does not reflect it.
Some analysts and investors appear to take at face value Matthews' vow that he would never sell Newbridge to a larger company. Newbridge chief executive Terence Matthews has said that if Newbridge was ever sold against his will, he would take the loyal employees and set up shop across the street, leaving an empty shell here his company use to be. But everyone has a price, and a generous offer a year from now might find the Newbridge board in a different frame of mind, Silverstein says.
"I think there are a number of companies that would be interested in Newbridge ... and it is a tough market to stand alone in," he says. "About nine to 18 months from now, I wouldn't be surprised to see Newbridge as part of a larger organization."
Meanwile, Newbridge's alliances with Siemens and Ericsson are not exclusive. "Siemens has been a great partner of Newbridge, but they are not the only company out there, and it would be a mistake for Newbridge to rely on one strategic partnership," Silverstein says.
The Siemens relationship has paid dividends by helping Newbridge nail some important European contracts, but it has not necessarily brought valuable new technology to Newbridge. For example, the jointly marketed 36190 switch, designed by Siemens, has been criticized for not living up to Newbridge's traditional quality standards.
Regards;
Glenn
Please note I made a comment about Cky not being the oldest affiliate.
This article has been retyped so any mistakes are mine (it has been done in the middle of the night however I felt that everyone would find it interesting). |
