Market hails Alcatel's Xylan buy but awaits follow-up
ReutersPlus, Wednesday, March 03, 1999 at 14:23
By William Emmanuel
PARIS, March 3 (Reuters) - Investors hailed Alcatel's
(SBF:CGEP) $2.0 billion agreed cash bid for internet equipment
maker Xylan (NASDAQ:XYLN) on Wednesday, sending the share up by 10
percent, but analysts said the French group still has to
complete its Internet line-up.
"Alcatel stands to benefit from the strong profitability of
Xylan (with an operating margin of 15.9 percent compared to 13
percent for Cabletron (NYSE:CS), 25 percent for Cisco (NASDAQ:CSCO) and
4.7 percent for Alcatel) and contribute to the recovery of the
enterprise and consumer division," said research bureau IFF in a
note to clients.
Alcatel rose 7.49 percent to 109.1 euros having earlier
reached a high of 114.30 and having been suspended limit up.
Analysts said that while the operation is positive, the
share rise was exaggerated and futher acquisitions were needed
to really compete with Lucent (NYSE:LU), Nortel/Bay (TSE:NLT) or
Cisco.
"The main factor behind the rise to day is a change in the
appreciation of the share. But it is exaggerated, we see a small
correction of an excessive downward movement," said a French
bank analyst, referring to a 38 percent one-day fall on
September 17 after a profit warning.
Jean-Laurent Bruel, fund manager of Banque Privee Quilvest,
said there was a "re-evaluation of the share for fundamental
reasons. Alcatel has been massacred to such an extent that it
was poorly represented in portfolios."
Traders said the share was still trading at a discount of 50
to 60 percent to its main rivals. One analyst said that with a
discount of 30 percent, Alcatel would trade at 135 euros, still
far away from its historic high of 217.24 euros of July 16,
1998.
Analysts also said the group had improved its communication
with the markets after the September plunge which had damaged
the credibility of Chairman Serge Tchuruk.
The Xylan buy "is the materialisation of an Internet
oriented strategy," said a trader at a Paris brokerage.
"It shows that Alcatel is back on the right track but other
acquisitions have to follow," he said, adding an announced
pending acquisition in remote-access would not be enough.
"Alcatel has to make more acquisitions and it has the means
for it," said another trader, noting the group had a gearing of
three percent.
The bank analyst also said further acquisitions were needed
and added the market was now looking forward to the March 11
presentation of the final results for 1998 where Tchuruk could
further expand the Internet strategy.
Wednesday's alliance with Dialogic Corp (NASDAQ:DLGC), to develop
a technology platform to combine a the telephone, computer and
Internet functions for small and medium-sized companies was
"interesting" but remained fragile.
"Alcatel does not need alliances but acquisitions," an
analyst said, noting Lucent's recent acquisition of Ascend which
had been an Alcatel ally.
paris.newsroom@reuters.com))
Copyright 1999, Reuters News Service
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