TO All: WDR on LU and ASND relationship
WARBURG DILLON READ
"Wall Street Tech" is the email newsletter on Telecom Equipment, Data
Networking and Telecom Software from Warburg Dillon Read LLC (WDR).
For comments or to unsubscribe to the list, contact Bill Michels.
Nikos Theodosopoulos 212.821.6951 nikos.theodosopoulos@wdr.com
Jeff Schlesinger 212.821.4715 jeffrey.schlesinger@wdr.com
Scott Heritage 212.821.6828 scott.heritage@wdr.com
Mike Agarwala 212.821.3192 michael.agarwala@wdr.com
Scott Searle 212.821.3468 scott.searle@wdr.com
Anton Wahlman 212.821.3675 anton.wahlman@wdr.com
Joseph Wolf 212.821.5150 joseph.wolf@wdr.com
Bill Michels 212.821.2207 william.michels@wdr.com
______________________________________________________________________
Our research suggests that the relationship between Lucent
(LU-Buy-114) and Ascend has improved over the past two months. As
mentioned in past notes, Lucent began a new agreement with Ascend a
few months ago and is marketing Ascend ATM switches. In addition, we
believe that Lucent's internal developments for ATM switching
equipment continue to face delays, which make product overlap issues
less meaningful in the near to intermediate term. Finally, we estimate
Lucent's stock appreciation now makes a combination with Ascend
neutral to earnings even with a 25%+ premium to Ascend's stock at
yesterday's prices. Thus, we are increasing our probability of such a
combination to over 50% from under 50%. We emphasise, however, that we
are not aware of any imminent deal and that anything could happen
here.
Highlights:
Our research suggests that a combination between Ascend and Lucent is
more likely to happen than less likely. This is a change from our
prior view. We believe the probability is higher for the following
reasons.
1) Lucent began a new marketing relationship with Ascend a few months
ago whereby Lucent is selling Ascend ATM switches. We believe that
both companies have benefited from this relationship with increased
sales.
2) In addition to this new relationship, some of Lucent's largest
customers like Bell Atlantic that use Lucent as a systems integrator
have asked Lucent to utilise the Ascend ATM switching platform.
3) Ascend has not been as successful overseas in WAN switching.
Lucent would probably increase sales for Ascend overseas as has
already been witnessed by one win in KPN in the Netherlands as part of
of the existing agreement with Ascend.
4) Lucent has already discontinued its core ATM Globeview-2000 switch
which eliminates a direct overlap with the Ascend 550 switch. The
internal switch being developed by Lucent is not likely to hit the
market until 2000.
5) While Lucent has not discontinued its edge MX-1000 ATM switch, the
first couple of releases of this product scheduled for 1H99 will not
be fully featured. In addition, we believe certain features have been
delayed on this switch.
6) While there is still an overlap between the PM4 remote access
concentrator from Lucent and the Ascend TNT, there is not much
customer overlap between Lucent and Ascend in the remote access
concentrator market.
7) Perhaps most significantly, Lucent's P/E is now the highest it has
ever been since the company is public. Also, Lucent's PE is trading at
a 27% premium to Ascend's PE which is at the high end of the
historical range since Lucent was able to use pooling accounting.
8) We emphasise that we are not aware of any imminent deal. We just
believe recent developments between the companies, their respective
customers and relative valuations suggest that a combination is more
likely than less likely. At current prices, we estimate Lucent could
acquire Ascend at around $85/share with no or little dilution in 1999
without any synergy assumptions.
|
