OK, guys. One more "This is just in" - and this one WILL send CSCC to $40-
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08:22am EST 26-Feb-97 UBS Securities (Nikos Theodosopoulos (212) 821-695) ASND
ASND: COMMENTS ON YESTERDAYS RUMOR ON ASND/CSCC COMBINATION
UBS SECURITIES EQUITY RESEARCH February 26,1997
Nikos Theodosopoulos (212) 821-6951 Scott Heritage (212) 821-6828
ASCEND COMMUNICATIONS (ASND-OTC)
ASND: COMMENTS ON YESTERDAYS RUMOR ON ASND/CSCC COMBINATION
RATING BUY
______________________________________________________________________________
Price 62.00 | EPS P/E
52 Week 80.25-38.25 | 12/1995A 0.28 NM
Dividend Nil | 12/1996A 1.02 60.8
Yield Nil | 12/1997E 1.47 42.2
Shs. Out 130.0 Mil. | 12/1998E 2.00 31.0
Market Cap. 8.1 Bil. | 1Q EPS Est. 0.33 vs. 0.17 last year
______________________________________________________________________________
* Yesterday, rumors circulated that Ascend (ASND-Buy-62) would acquire Cascade
(CSCC-Hold-32.5)
* Given increasing competition between Ascend and Cascade over past few
quarters, we consider a combination unlikely now
* Such a combination we believe would only occur if both companies view the
combination as a better way for taking on Cisco (CSCO-NR-56.5) and they do not
need to spend much time on achieving the best price for the transaction
* We believe that a deal would be non-dilutive to Ascend at up to $40 a share
for Cascade including a downward adjustment on our Cascade estimates given the
elimination of any remote access revenues for Cascade in 1997 and 1998
Another M&A Rumor on The Street
Yesterday, rumors circulated that Ascend would acquire/merge with Cascade. In
the past, such a combination was very logical given the strong positions that
Ascend and Cascade respectively held in Internet/Intranet remote access and
frame relay/ATM switching technologies. We believe these synergies were
stronger in the past and that both companies have considered such a
combination. Over the past year, however, both companies have made
acquisitions and internal investments to develop new products and features that
would increase the level of competition between the two companies.
Specifically, Cascade acquired Arris Networks to develop remote access products
which competes against Ascend's core business, while Ascend added frame relay
features on the newly released TNT remote access products which competes with
certain applications of the Cascade 9000 frame relay switch. We believe these
investments make a combination less likely than in the past.
Change In Thinking Needed For Such A Deal To Happen
We believe that the main change that might stimulate this combination would be
both companies viewing the combination as a more forceful way to compete with
Cisco. Cisco's acquisition of StrataCom has led to a more aggressive
competitor against Cascade. In addition, Cisco's comments on the most recent
earnings conference call indicated that they are adding new features to more
aggressively compete against Ascend in the international market for remote
access concentrator market. We believe that the main change in thinking
between Ascend and Cascade over the past few quarters that might stimulate a
discussion on a business combination would be the ability to more effectively
compete against the larger Cisco Systems. Otherwise, we believe the more
competitive situation between Ascend and Cascade makes the combination less
likely than in the past especially if price is even a topic of discussion this
time around.
Potential Impact On Earnings For Ascend
We believe that any combination would be non-dilutive for Ascend up to
$40/share for Cascade. This is based on adjusting our estimates for Cascade in
1997 and 1998 downward by eliminating all remote access revenues given that
such revenues would not be very likely if Ascend and Cascade were to combine.
A combined Ascend/Cascade, we believe, would seek to leverage R&D by
eliminating investments in common products/technologies. For example, Cascade
could focus R&D spending more on bringing to market its next generation higher
capacity ATM switch while Ascend would not need to partner or invest in this
area if the two companies merged. Elimination of other operating expenses
would be minimal as both companies have limited direct sales presence with
international telephone companies. We estimate that Cascade's 1997 and 1998
earnings would be in the $0.95-$1.05 and $1.25-$1.35 range, respectively, after
eliminating remote access products as compared to our current estimates of
$1.10 and $1.62. Given this view, we believe that Ascend could pay up to
$40/share for Cascade without diluting its 1997 and 1998 earnings assuming the
stock stays above $60/share.
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-> End of Note <- |
