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redherring.com
Nortel pulls a switcheroo
By Dan Briody
Redherring.com, July 31, 2000
Just when everyone thought Nortel Networks (NYSE: NT) was going to zig, it zagged.
After weeks of speculation that Nortel was gearing up to cut a huge deal with Corning (NYSE: GLW),
possibly combining the two companies' optics units in a spin-off worth $100 billion, talks broke down on
Thursday. And less than 24 hours later, the Canadian telecom giant announced its intent to acquire
Alteon Websystems (Nasdaq: ATON), an Internet infrastructure company that makes Web switches, for
$7.8 billion on Friday.
Nortel is offering 1.83 shares of its own stock for each Alteon share. Based on Thursday's stock prices,
which valued Alteon at about $144 a share, just $1 higher than Alteon's Thursday closing price. Investors
were caught a little off-guard by the news and took their surprise out on both stocks, sending Alteon down
14 percent and shaving more than 7 percent off Nortel.
BUILT-IN PREMIUM
After seeing Infospace pay a hefty 45 percent premium on Wednesday for Go2Net, Alteon investors were
scratching their heads when Nortel announced its no-premium offer. Company officials avoided questions
about the pricing issue and subsequent stock slide, attributing the sell-off to general market volatility and
an overall tech slump. They chose instead to focus on the general strategy of the combined units.
"The market has been very volatile," said Clarence Chandran, chief operating officer of Nortel Networks.
"The important thing is that Internet goes at warp speed, and this is all about time to market and speed."
Given that Alteon was up to $143 a share from a low of $41 in April, many felt that the premium was
already built into the stock price. Once Cisco (Nasdaq: CSCO) picked up Web switching company
Arrowpoint Communications in May for $6 billion (which coincidentally was also a no-premium deal),
rumors spread quickly about Nortel targeting Alteon, and the stock ran up aggressively on the news.
Analysts feel the acquisition price had already been factored into Alteon's stock.
In addition, few of Nortel's competitors are currently in a position to pull off an acquisition like this, which
may have made it easier for Alteon to accept a deal without a sizable premium attached to it. With
Cisco's Web switching strategy being nearly complete following its acquisition of Arrowpoint, that left
companies such as Lucent Technologies (NYSE: LU) and Alcatel (NYSE: ALA) as possible suitors for
Alteon.
Lucent's stock has languished as of late due to its recent earnings warnings, so it clearly was not in a
position to make such a big deal. And even though Alcatel's stock has risen nearly 70 percent this year,
Nortel has a much higher valuation than Alcatel. Nortel's market cap is more than three times larger than
Alcatel's.
EASY, TIGER
So now that Nortel faked left and went right, investors are wondering what the next move for the
networking behemoth will be. Analysts say that the deal with Alteon does not preclude any further action
in the optics space, and most expect Nortel to continue to pursue a deal in that area.
"I don't think that what you have seen is a massive change in corporate direction, but the timing of it
caught a few people off kilter," said Michael Neiberg, analyst with Chase H & Q.
Likely to have a few more surprises up its sleeve, Nortel is now leading the league in M & A rumors, the
latest of which has them in talks with Corvis (Nasdaq: CORV), which just went public on Friday. However,
analysts say that is highly unlikely, given Nortel's recent acquisition of Corvis competitor Qtera.
Nortel is continuing to expand the optical side of its business, both organically and through acquisitions.
Earlier in the week Nortel announced that it earmarked $1.9 billion to double the size of its fiber-optics
manufacturing over the next two years. And with recent acquisitions of Xros, CoreTek, and Qtera -- all
fiber-optics developers -- Nortel's appetite for deals shows no signs of abating.
"There is no reason to think that this deal [with Alteon] would suggest that they will not do something from
an acquisition standpoint in optical," said Nikos Theodosopoulos, analyst at UBS Warburg.
A Nortel spokesperson seconded that sentiment, saying that the company looks at 100 companies a day
for potential alliances, mergers, and acquisitions.
At that rate, investors should brace themselves for a wild ride, because they are likely to see many more
surprises down the road.
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