TALES OF THE TAPE: Shorts Bet Lucent Won't Pay For Ascend
By JOELLE TESSLER
Dow Jones Newswires (see bold)
NEW YORK -- An investment in Ascend Communications Inc. (ASND) is a can't-lose
proposition, many Wall Street analysts say, because the company is in the right market
at the right time and is an attractive acquisition target to boot.
But with a sizable takeover premium in the stock, many industry watchers are warning
that a deal is far from assured and that Ascend's shares could fall by as much as 20% if
one doesn't materialize. And this has drawn a growing number of short sellers into the
stock as many bet against Ascend's chances of being bought.
As a major provider of data networking equipment to telephone companies and Internet
service providers, Ascend is in a great position to benefit from the explosive growth of
the Internet and in the amount of data traffic traveling over carrier networks, analysts
say.
On top of this, speculation that Lucent Technologies Inc. (LU) could make a play for
Ascend has been swirling for months as the big telecommunications equipment
companies eye the makers of data networking gear as they try to adapt in this
rapidly-changing market. Though neither company would comment on these rumors,
many sources believe the two have at least held talks on a deal.
But as a rising short position in the stock indicates - short interest stood at more than
24.3 million shares as of Oct. 15, up from 18 million shares as of July 15 - there is
another view on Ascend.
With the shares trading at about $50 - and talk that company officials are unlikely to sell
for less than $70 to $75 a share, at least - some warn that Lucent and Ascend may not
be able to agree on a price.
"I just think that on a valuation basis, it's too high," Jeffrey Pittsburg, a partner in
Goldis-Pittsburg Institutional Services, said of Ascend. "Lucent would be paying a very
hefty price."
With about 200 million shares outstanding, Ascend would be worth $14 billion at $70 a
share, and $15 billion at $75.
And if Lucent ultimately decides that the price is too high, Ascend would be left to fend
for itself in an industry dominated by giants.
Ascend is, after all, competing against much-larger companies like networking goliath
Cisco Systems Inc. (CSCO), which is stepping up its push into the carrier market, and
telecom equipment maker Northern Telecom Ltd. (NT), which has expanded into the
data part of the business through its recent acquisition of Bay Networks.
Ascend would also, of course, be up against Lucent, which has made no secret of its
intentions to establish itself in data networking, one way or another.
No further information is available at this time.
Still, Ascend supporters say, the prospects for the company are bright, even if it remains
independent, because Ascend has a strong foothold in a fast-growing part of the
networking business: the carrier market.
Many analysts are warning that enterprise spending on networking gear could slow in
1999 because many big corporate customers - particularly those in the financial services
business - have been hit hard by economic problems overseas.
But the carrier side of the business continues to see robust growth since all of the big
telecom companies - ranging from the traditional leaders such as AT&T Corp. (T) and
the Baby Bells to the emerging independent carriers and ISPs - are spending heavily to
build out a nationwide IP, or Internet Protocol, backbone that can handle data traffic
and integrate data and voice.
Kevin Fong, a general partner in the Mayfield Fund, a Silicon Valley venture capital firm, estimates that the carrier part of the business is growing at a rate of 40% to 50%
annually, versus 25% to 30% in the enterprise market.
And Ascend - which has two key businesses: the ATM switching products that came
from the purchase of Cascade Communications in June 1997, and remote access
equipment - has successfully capitalized on this growth, said Sanford C. Bernstein &
Co. analyst Paul Sagawa.
Its customers include many of the biggest names in the telecommunications industry,
among them Bell Atlantic Corp. (BEL), GTE Corp. (GTE), Qwest Communications
International Inc. (QWST), AT&T, MCI Worldcom Inc. (WCOM), US West Inc.
(USW), PSINet Inc. (PSIX) and Earthlink Network Inc. (ELNK).
"Ascend has a huge percent of the carrier market," said Anthony Kim, an analyst at
Neuberger & Berman. "They are a top-notch supplier with a leadership position."
It is for these reasons that many believe Ascend would be a perfect fit for Lucent, which
wants to build up its asynchronous transfer mode - or ATM - backbone products and
its IP router products, as well as its remote access business, according to Sagawa.
While Lucent does have an IP switching product called the PacketStar, its MX 1000
ATM switch is not shipping yet. And though the acquisition of Livingston Enterprises in
December 1997 gave Lucent a good remote access product, Livingston lacks a sizable
customer base - which is critical because the cost of switching equipment vendors is
high, Sagawa said.
But concerns that Lucent may not pay up for Ascend have been building since Oct. 1.
On that day, a two-year moratorium preventing Lucent from transacting pooling of
interest deals expired - giving the AT&T spinoff much more flexibility to make big
acquisitions. Expectations that Lucent would make a play for Ascend once the
moratorium expired were so high that Ascend's stock slipped in the days after the date
passed and no deal was announced.
Ascend's recent purchase of Stratus Computer Inc. - which has left it with three
non-telecom businesses to divest - as well as the steep decline in Lucent's stock price
during the broader market correction at the end of the summer have both raised
potential hurdles to an acquisition.
Using an exchange ratio of 0.81 or 0.82 of a Lucent share for each Ascend share,
Sagawa figures Lucent's shares would need to pass 90 and stay there for a deal to go
through. The stock, which climbed as high as 108 1/2 in July but fell to as low as 53
7/16 in October, is now in the mid 80s.
In recent weeks, some have begun to speculate that Lucent could build up its ATM
switching operations and IP switching capabilities with a cheaper acquisition of a
company like Newbridge Networks Corp. (NN) or Fore Systems Inc. (FORE) or even
Xylan Corp. (XYLN).
Joel Achramowicz, an analyst at Preferred Capital Markets Inc., believes Newbridge
would be worth about $8 billion in a takeover, while Fore would be worth about $3
billion and Xylan would be worth $1.5 billion.
"To pay $15 billion to get a technology that you could get by buying a different company
for less ... it just seems you could skin the cat a different way," Achramowicz said.
Not everyone sees things this way, however.
Sagawa maintained that Fore, for instance, "doesn't give Lucent what they need" since
its ATM gear isn't designed to support a full range of services like frame relay and is not
as flexible as competing products.
Still, Sagawa acknowledged, "the question is whether Lucent is fooling itself into thinking
that it can do a string-of-pearls approach" - through a number of smaller deals - to
establish itself in data networking.
While Lucent's intentions remain the subject of much speculation, one thing is becoming
clear. As Achramowicz put it, "if word gets out that Lucent is unequivocally not going to
purchase Ascend, it could pressure the stock."
Sagawa believes Ascend shares could fall to $40 to $45 without a deal. And
Achramowicz said Ascend is worth about $40 a share, or about $8 billion, on a
fundamental basis.
Short sellers have found other causes for skepticism as well. For one, Ascend's latest
earnings report rattled investors because revenue from the company's core switching
business slipped slightly sequentially in the third quarter.
In addition, Ascend took an $8.7 million charge in the third quarter to write down loans
that it had provided to competitive local exchange carrier - or CLEC - customers to
purchase its equipment. Although the company wrote off the loans to be conservative,
the charge sparked worries that Ascend is selling to customers who can't pay their bills.
But in the end, the shorts maintain, if Ascend remains independent, it will have a tough
time competing in an industry that is consolidating and concentrating market share in the
hands of a few leaders.
"It's hard to go it alone and go up against these guys," Achramowicz said.
|
