Experts ask: Is Bay in play?
By Jim Duffy
Network World, 5/18/98
nwfusion.com
Reports that Bay Networks Inc. refused a
buyout offer from Nortel spiked Bay's stock by
16 percent this week and whipped up a flurry of
rumors and speculation.
Bay and Nortel officials would not comment, but
sources said Nortel wants to announce a Bay
acquisition at the Supercomm 98 show in Atlanta
June 8.
The amount of the alleged Nortel offer is not
known, but sources say it was between US$32
and $35 per share, or $7.3 billion to $8 billion.
Bay shares are currently trading at $26.38.
Observers believe Bay will agree to be acquired
for $40 per share, or $9.1 billion. The company's
market cap is currently $5.5 billion.
The time is now at hand for Bay, Cabletron
Systems Inc. and even perhaps 3Com Corp. to
woo a telecom suitor in order to compete with
Cisco Systems Inc. in the voice/data megabattle
of the next millennium.
Cisco is the pre-eminent supplier of IP routers
for the enterprise and service provider markets.
The network giant became an instant force in
WAN switching with its $4 billion purchase of
StrataCom Inc. two years ago.
With the industry moving toward converged
voice and data over IP networks, Cisco is
entering the ranks of the Nortels, Lucents, LM
Ericssons and Siemens AGs of the world and
leaving its Big Four brethren behind. But while
Cisco chases Nortel, Lucent Technologies, Inc.
and others, Bay, Cabletron and 3Com are still
chasing Cisco.
Unfortunately, Bay, Cabletron and 3Com lack
the financial, market and R&D where-withal to
catch Cisco on their own, observers say.
However, Nortel, Lucent and other telecom
powerhouses lack data expertise.
It therefore behooves Bay, Cabletron and 3Com
to beautify their enterprise assets to attract and
marry one of the telecom heavies. And this
week's alleged Bay/Nortel overture is yet
another indication of the need to woo a suitor.
"It's symptomatic of the ongoing, continuing
convergence of the voice and data world, and
the pressures to establish a critical mass," said
Andy Schopick of Nutmeg Securities. "I
wouldn't dismiss [these reports] as being some
ridiculous thing. If it's not Nortel [coveting Bay], it could be somebody else, and I think we will
see one or two megamergers over the next six to
12 months in the networking arena."
"Bay's been in play the whole time," said Scott
Heritage, an analyst at UBS Securities in New
York. "This is not new. There's been speculation
going on [about a possible acquisition] for the
last six months."
Before this week's development, the popular
belief was that Lucent would make a run at Bay,
given that the companies have a multimedia
technology sharing and joint product
development partnership going back two years.
More recently, Lucent acquired Yurie Systems,
Inc., a maker of ATM access multiplexers, that
Bay is reselling under an OEM arrangement.
Conversely, Nortel has been allied with
Cabletron for more than a year in a "Power
Network" partnership to build integrated
voice/data multimedia networks. But analysts
note this union has produced little, if any, power
to date.
3Com, meanwhile, has a partnership with
Newbridge Networks, Inc. and Siemens to
deliver desktop-to-desktop class of service over
IP networks.
Its relationship with Lucent aside, Bay might be
better served to wait until October to wed a
telecom company. October is when Lucent is
allowed to use the pooling of interests method to
acquire a company.
Pooling of interests allows companies to combine
balance sheets and report higher earnings without
tax impact. Lucent was prohibited from pooling
for two years after being spun off from AT&T.
Not only would pooling be attractive for Lucent,
it might raise the price for Bay because Nortel
and Lucent could get into a bidding war for the
company. Indeed, some speculated that any
Nortel offer would be a preemptive move to
swipe Bay from rival Lucent before October.
Users seem resigned to the prospect of Bay
being snapped up sooner or later.
"It probably would just make them stronger,"
said Randy James, vice president of development
at Community First Bancshares, Inc. in Fargo,
North Dakota. 'It probably would make sense
for a combination like that, but I don't see that
there's any-thing [Bay is] lacking strategically."
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