Lucent-Ascend Deal Could Threaten Cisco
By Kevin Petrie
Staff Reporter
1/11/99 3:40 PM ET
Lucent (LU:NYSE)'s reported purchase of computer networker Ascend
(ASND:NASDAQ) could spell trouble for rival Cisco (CSCO:NASDAQ).
According to reports in The Financial Times today, Lucent is involved in
talks to buy Ascend for about $16 billion in a deal that could be announced
as early as Wednesday. An Ascend official declined to comment, calling the
reports speculative. "To my knowledge, there are no talks," he said.
Company officials at both Lucent and Cisco declined to comment on the
reports.
Since October, when certain financial restrictions on Lucent were lifted, the
business community has been abuzz with rumors of a possible deal
between Lucent and Ascend. The deal would allow Lucent to challenge
Cisco, the leading supplier of gear for computer networks, which is blazing
a path into the telephone equipment business.
One reason is that Ascend has particular strengths, gained after it acquired
in June 1997 Cascade, a supplier of asynchronous transfer mode, or ATM,
switches that carry high volumes of Internet signals.
"Ascend's Cascade division has been beating [Cisco] in terms of deploying
switches in the backbone" of large networks, says Hilary Mines, executive
vice president with market researcher Probe Research. Lucent brings
prestige and size to the equation, Mines says. It is large enough and
established enough that customers needn't worry about its long-term
viability. In the past, some telephone carriers had shied away from buying
Ascend equipment. Carriers would like to procure their network equipment
from fewer suppliers and are generally more conservative in their
purchasing habits. Probe Research does consulting work for all three
companies.
Lucent boasts of $30 billion in annual revenue, three times that of Cisco.
Even at $1 billion in sales, Ascend represents Cisco's most serious Internet
rival.
Yet, a Lucent-Ascend combination would not be likely to catch Cisco
unawares. "They knew it was coming," says Mines.
While Lucent has been dominant in telephone equipment, the perception
was that it lagged Cisco when it came to computer networks. Acquiring
Ascend allows Lucent to boost its technology in one massive move.
"Lucent's customers have been very enthusiastic about them combining with
Ascend," says analyst Tim Luke with Lehman Brothers. The possible
merger is "a negative factor" for Cisco. Luke still rates Cisco stock a buy;
he does not officially cover Ascend.
The big purchase would be right in line with Lucent strategy. While Cisco
sticks to bite-size acquisitions -- typically private startups -- Lucent has been
very aggressive since its spinoff from AT&T (T:NYSE) in 1996. Just today
Lucent disclosed plans to buy Kenan Systems, a developer of billing
software, for $1.5 billion in stock.
Acquiring Ascend would be Lucent's largest deal to date, and it would
compound the challenges of integrating disparate operations. For example,
Ascend competes directly with Livingston, a supplier of Internet dialup
products that Lucent purchased in December 1997. Lucent might have to
ease Livingston customers to Ascend technology. |
