WSJ article on LU/YURI. Stix (Cowen) comment on LU buying ASND/BAY
Excerpt: "Mr. Stix said
Lucent could end up trying to buy Ascend Communications or Bay
Networks, two suppliers that could give it more throw weight in the market.
Ascend has the installed base and sales force to give Lucent entree to a lot
of customers, while Bay "is the only credible alternative to Cisco in the
market for high-end data routers," noted Mr. Stix."
Lucent Agrees to Acquire
Yurie Systems for $1 Billion
By JOHN J. KELLER, 4/28/98
Staff Reporter of THE WALL STREET JOURNAL
interactive.wsj.com
Lucent Technologies Inc., adding relentlessly to its data-technology assets,
agreed to buy data-equipment supplier Yurie Systems Inc., for $1 billion, a
slight premium over Yurie's stock-market value.
Lucent said the purchase would result in a one-time charge to its earnings
for the third quarter and would lead to a "slight" dilution of its 1999
earnings. Lucent officials declined to elaborate.
A billion dollars would seem like a lot of money
to pay for a company that had annual revenue
last year of just $51 million, but Yurie has
quickly cashed in on the increasingly critical
need for high-capacity data networks -- a
market in which Lucent had fallen behind
aggressive data-networking suppliers such as
Cisco Systems Inc. A highflier since going
public early last year, Yurie, of Landover, Md.,
makes systems that turn different kinds of
digital traffic -- such as encoded voice calls and
corporate data -- into single streams that can
be handled efficiently by high-speed traffic
exchanges. These so-called asynchronous
transfer mode -- or ATM -- switches are
expected to be critical components of future
public-communications networks.
Yurie "was early to market with a leadership
product in a market that's about to explode"
from $100 million in annual sales today to $600
million by the year 2000, said Bill O'Shea,
president of Lucent's Data Network Systems
Group. Lucent already sells some of Yurie's
products to its phone company customers.
Under the agreement, Lucent will pay $35 for
each Yurie share, a small premium over the
$31.50 closing price of Yurie on Friday. Yurie
shares jumped 10% Monday on the news,
closing at $34.75, up $3.25, in Nasdaq Stock
Market trading. Meanwhile, trading in Yurie
call options was much higher Friday than the
company's average daily volume, indicating that
traders expected the price of Yurie's stock to rise. Lucent fell $1.4375, or
2%, to $71.9375 in composite trading on the New York Stock Exchange
Monday.
Burden on Phone Networks
The telecommunications industry is undergoing a fundamental shift in
investments as demand for high-speed data transmission and access to the
Internet put a greater burden on traditional phone networks. Carriers such
as AT&T and the Bells must upgrade their networks to handle booming
Internet traffic along with traditional voice phone calls. As one of their
principal suppliers, Lucent must provide public carriers and private
operators such as corporations with the systems to handle this so-called
broad-band communications traffic. Otherwise, rivals such as Cisco and
Bay Networks Inc. could get to these customers first.
The telecommunications industry doesn't have a lot of time. Internet traffic is
growing 1,000% a year and data traffic over the public network is doubling
annually. Voice calling, by contrast, is expanding at a single-digit rate.
"Data will account for more than 95% of the traffic on the public network
by the year 2005, and this will force public carriers to adopt a new
architecture for handling voice, data and video transmission," said
Christopher Stix, an analyst at Cowen & Co. Indeed, public carriers are
already coming under attack by new networks such as Qwest
Communications International Inc., IXC Communications Inc., Level 3
Communications and others.
Bigger Acquisition Possible
Lucent could end up making a much bigger acquisition by the end of the
year to accelerate its data strategy and bring it closer to data behemoths
such as Cisco and Bay, Mr. Stix said. Since its spinoff from AT&T, Lucent
has been restricted from using the pooling method of accounting to do
acquisitions, but those shackles come off in September. Mr. Stix said
Lucent could end up trying to buy Ascend Communications or Bay
Networks, two suppliers that could give it more throw weight in the market.
Ascend has the installed base and sales force to give Lucent entree to a lot
of customers, while Bay "is the only credible alternative to Cisco in the
market for high-end data routers," noted Mr. Stix.
Mr. O'Shea won't comment on Lucent's acquisition strategy, except to say
that its buying binge is far from over. Bay Networks wouldn't comment on
acquisitions, but said it doesn't anticipate changing its existing agreement to
sell Yurie products. Ascend officials couldn't be reached.
Yurie's management and personnel, which now number 238, will see their
responsibilities expand significantly at Lucent. Jeong Kim, Yurie's chairman
and chief executive, will become president of Carrier Networks within
Lucent's Data Networking Systems' group, and his team will take command
of all data-equipment products developed by Lucent for the public
telecommunications carrier market. Such customers include AT&T and
Sprint Corp. The unit will be based at Yurie's current headquarters in
Landover. "Both companies are driven by a powerful urge to succeed in
data networking," said Mr. Kim. Yurie got its start building ATM systems
for the government, including the Navy, which uses its gear for a
sophisticated network linking ships. Mr. Kim once headed this government
development of ATM systems. According to a federal filing in September,
Mr. Kim owned 13.6 million Yurie shares, which are valued at nearly $500
million based on the offer price.
Yurie's officers also include technical chief Kwok Li, who once worked for
Northern Telecom Ltd.'s Bell Northern Research Laboratory. Harry Carr,
a former chief of AT&T's Federal Systems Defense Division, is Yurie's
president and chief operating officer.
While Lucent has one of the largest hardware and software development
staffs in the world at its Bell Laboratories, Mr. O'Shea said it was much
faster and cheaper for Lucent to buy Yurie and let Bell Labs focus on other
telecom projects such as building the next-generation switches and
fiber-optic systems.
It is a strategy that Lucent has been following since the end of last year
when it began putting together purchases of key data-communications
suppliers to augment its telecom storehouse.
Late last year, Lucent agreed to purchase Prominet Corp., which builds
high-capacity Ethernet switches used by corporations to handle their
Internet traffic for $200 million in stock. That followed Lucent's agreement
in October to purchase Livingston Enterprises Inc., Pleasonton, Calif., for
$650 million in stock. Livingston makes "access gear" that converts voice
calls into "packets," or electronic envelopes, that can be transmitted over
the Internet and systems based on the same protocols.
Mr. O'Shea said long-term projects at Bell Labs call for the integration of
products such as Yurie's into single systems. Such gear would deliver a
range of traffic-handling capabilities, thus reducing the complexity and
operational costs of future data networks.
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