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To: zbyslaw owczarczyk who wrote (1472)	3/17/2000 7:51:00 AM
From: larry pollock	Respond to of 3891

Read this from CNBC.COM: Enter name or symbol ...click selection below: Quotes Charts Message Boards Recent Events Company Info Analyst Reports Insider Trading Industry Groups Other Links Stock Screener Business News STOCKS ANALYSIS Mar 17 2000 6:00AM ET More on Stocks Contributor... Nortel-Xros Deal is Supremely Rational by Pat Dorsey Stocks Editor, Morningstar.com Special to CNBC.com When Cisco Systems Inc. {CSCO} made its blockbuster acquisition of a small optical-networking company called Cerent last fall, it set a new high-water mark by paying $6.8 billion, or almost $24 million per Cerent employee. Cisco has generally paid about $4 to $5 million per employee when acquiring companies over the past year, so $24 million was something of a stretch, even considering the rich valuation of Cisco's shares. Earlier this week, Nortel Networks Corp. {NT} upped the ante in a very big way by shelling out $36 million per employee -- or $3.25 billion all told -- for an optical-networking start-up called Xros. (That's Chi-ros, for those of you who have forgotten the Greek letters you learned in your college fraternity days.) The value of the deal is all the more eye-popping when you consider that Xros's main product won't even be in trials until this summer and won't ship until early next year. Cisco Systems 52-week stock performance Nortel Networks 52-week stock performance What is going on here? Is this sort of thing just another example of the "irrational exuberance" that Federal Reserve chairman Alan Greenspan likes to carp about? Actually, it is supremely rational. If you are the chief executive officer of a richly valued company that competes in a fast-moving and fast-changing industry, you might as well use the firm's shares to acquire promising assets while those shares are still highly valued. After all, the higher the price of the stock, the fewer shares that have to be issued to complete a deal. And even if the valuation of the company's stock is in some way "irrational," you'd be a fool to not use the currency while you have it. As a CEO, it isn?t your job to value the company's stock, but it is your job to make the most of every opportunity that comes along -- and richly valued shares carry with them oodles of opportunity. Of course, this logic only holds if the acquiring company is getting something of value, and if the price it is paying isn't absurd. Although the price Nortel is paying for Xros seems to fail the latter test at first glance, a strong argument can be made that Nortel is getting a reasonable deal. There are two reasons for what may seem like blind optimism on my part, one specific and one general. The specific reason is that Xros' product -- a switch that allows wavelengths of Internet traffic to be redirected without the time and expense of first being converted to an electronic format -- truly is on the cutting edge of optical networking. Optical switches can go a long way toward helping relieve congestion at major junction points within the Internet's backbone. With Internet traffic doubling every six to nine months, anything than can eliminate bottlenecks is going to be in hot demand. Moreover, Xros's switch won "Best of Show" at the major trade show for the fiber-optic industry last week in Baltimore and has four times the capacity of a competing product introduced by Nortel competitor Lucent Technologies Inc. {LU} last fall. And if you are wondering just how many of these gizmos the world could possibly need, consider that industry-watchers Pioneer Consulting recently estimated that the global market for optical switching will be worth $15 billion by 2004. The point, however, isn?t just that Nortel bought some worthwhile technology. In getting its hands on Xros, Nortel also bought a very valuable option on the future of optical networking. Because the field is so fast-changing and fast-moving, simply having the option -- or choice -- of pursuing Xros's method of optical switching has a tremendous amount of value. No need to get into the gory details, but there is an entire new field of decision analysis called "real options" based on just this idea -- that the flexibility to pursue various courses of action has value by itself. In the end, there may just be a method behind the merger madness we are seeing -- in optics and in the rest of the tech sector. Cisco Systems Nortel Networks Lucent Technologies