Lucent Agrees to Acquire
Yurie Systems for $1 Billion
By JOHN J. KELLER
Staff Reporter of THE WALL STREET JOURNAL
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. |
