5/8/98 SmartMoney (II). Analysis of potential acquisitions [ASND is No. 1 choice]
smartmoney.com
LUCENT'S SHOPPING BASKET
HERE'S A LOOK at the four companies and why they may make attractive acquisitions.
Ascend Communications
Networking vendor Ascend (ASND) is everyone's first choice for a merger candidate. "Who would
I go after to make myself a major contender [in IP
networking]?" muses David Smith, analyst with Technology
Futures, a consulting firm in Austin, Texas. "Ascend. They
have the DSL technology; they have Frame Relay; they have
a [very fast] gigaflop-type of switch. They have the sales
pipelines, and they have the service and support" to reach
small businesses.
Key assets that Ascend could bring to Lucent (LU) are its
products for connecting telephone networks with business,
including small office routers, as well as its MAX series of
wide-area networking devices. These are basically boxes
with numerous modems that can be used to handle large
volumes of data networking connections in a large
corporation, an Internet service provider's facilities, or,
potentially, a telco's central office.
Despite its acquisition of Yurie and others, Lucent has a
ways to go to make headway against Cisco's (CSCO) 85%
ownership of the Internet Protocol (or IP) routing market.
Nonetheless, Lucent is strong in the market for ATM
switching gear that runs in carrier networks, and the
reliability of its equipment has been proven in the
marketplace through years of servicing telcos.
What's more, Smith says the chip expertise in Lucent's semiconductor division, when combined with Ascend, could prove
formidable enough to force Cisco to seek semiconductor
partners. At $8 billion in market cap and trading at almost
twice its 52-week low, Ascend is anything but a steal, but
that might not matter in a stock swap.
BACK TO INTRO
Bay Networks
The "Big Four" of data networking, namely Cisco, 3Com
(COMS), Bay (BAY) and Cabletron (CS) are all obvious
candidates. Bay and Cabletron, being the smaller of the four,
are the most likely picks. Bay could give Lucent experience
with service and sales to business customers, and a presence
in corporate networks, much like an Ascend purchase
would, and it would offer Lucent some expertise in the area
of IP switching. The question is whether Lucent really wants
to be involved at all with corporate networks. Or will it be
content to continue selling gear into carrier networks and to
service providers. "They need carrier data," says
BancAmerica's Johnson. "A corporate piece is unimportant
to their strategy."
From the standpoint of a brand name, 3Com would
undoubtedly carry greater weight with corporate managers, and might be worth double the price of Bay, or about $12 billion in market cap. Analysts have also mentioned Fore
Systems (FORE) as a plug for certain data networking
weaknesses. Fore recently announced a pact with Intel
(INTC) to develop products that combine different data
networking technologies, building on Intel's base in Ethernet
and highlighting the importance of semiconductor technology
as a shaping force behind networking gear. However, Fore's
strength is in equipment for asynchronous transfer mode
technology (ATM), where Lucent is already considered to
be quite strong, and the consensus is that Lucent instead needs to beef up its capabilities in IP despite its acquisition of Yurie.
BACK TO INTRO
Nokia
With $8.5 billion in revenue last year and a $30 billion market cap, Nokia (NOK/A) comes in about seventh or
eighth on the list of the world's largest telecom suppliers.
Aside from having the equipment necessary for European
wireless networks that are delivering digital cellular Personal
Communications Services (PCS), which would complement
Lucent's CDMA wireless technology, Nokia has telephone
data technology known as "SDH" that would round out
Lucent's holdings overseas.
Schroder & Co. analyst Phil Serlin says an international
equipment play makes even more sense, given that Lucent is
the world's largest manufacturer of the GSM chips that
Nokia and others use in their equipment, as well as the
world's largest developer of DSP chips that go into
communications gear. (Vertical integration, anyone?) Plus,
Nokia obviously has the contacts with European telecom
firms and with China's telecommunications bureaucracy that
Lucent would need to establish its presence as a major
supplier on the continent and in Asia.
Aside from being considerably cheaper than some of its
European partners, Nokia has a leaner product line than,
say, Ericsson (ERICY). "Lucent is more than 80% North
America," says Alex Cena of Bear Sterns. "Nokia is 60%
Europe, 23% Asia. It's a match made in heaven." Cena argues that given the Yurie and Livingston acquisitions, Lucent has little need for a big data networking buy. "If you're going to keep your powder dry, why not keep it to plug a bigger need, like the international market?" Analyst
Steven Levy of Salomon Brothers concurs, adding that
Ascend and Bay would both take Lucent too far into the
corporate world and away from its focus on the telephone network. Nokia stock has about doubled since January, to
66 today, giving it a forward P/E of about 27.
BACK TO INTRO
P-Com
This $855 million maker of wireless networking equipment
wouldn't stretch Lucent's balance sheet too much, but it's
just the kind of acquisition analysts say may represent
another outcome of Lucent's stock pooling. Instead of one
huge deal, Lucent could also undertake a series of small
acquisitions designed to give it strategic products in
particular areas.
Specifically, P-Com's (PCMS) expertise in local multipoint
distribution systems (or LMDS), a high bandwidth radio
technology for data transmission that can be an alternative to
DSL or cable, might be important for next-generation
wireless data networks that could deliver broadband Internet
access to homes. In the U.S., the FCC recently auctioned
the spectrum for LMDS services for $579 million, and
AT&T has frequently talked about rolling out residential
phone service using cellular technology. In international
markets, however, there is rising demand for wireless as a
substitute for basic phone service where twisted-pair copper
wiring either has not been built out or is not feasible for
technical reasons.
One consultant working on projects in Latin America says
that the revenue from the buildout of a so-called
third-generation local loop to deliver basic voice
communications in Brazil and elsewhere could ultimately
eclipse total revenue from North American wireline services.
Lucent recently purchased the LMDS equipment business of
Hewlett-Packard (HWP), but apparently much of that
equipment is still in development. P-Com doesn't yet have
parts for the 28 gigahertz spectrum band, where LMDS
takes place, but its expertise in radios could be critical for
future product development.
"Radio engineers, especially in the millimeter wave band, are
going to be extremely valuable in future," says Craig
Mathias, principal with The Farpoint Group, a technology
consultancy. P-Com last month reported net income of $5
million on first quarter sales of $58 million, up 33% from the
same quarter last year, and at around 19, it comes at a
relatively cheap P/E of 25.
BACK TO INTRO
-- By Tiernan Ray
<< DAILY SCREEN ARCHIVE
|
