Nortel, Bay Networks Meet At The Net
Date: 6/18/98
Author: Michele Hostetler
Northern Telecom Ltd. could give Bay Networks Inc. the clout it needs to sell more data networking gear to Internet service providers and telecommunications firms.
Canada's Northern Telecom, the second-largest maker of phone network gear, said on Monday that it plans to buy Bay for about $7 billion in stock. It would be the largest merger of voice and data networking companies. More users want networks that let them make phone calls, access the Internet and share data among colleagues.
Bay's expertise in Internet Protocol technology is a big reason Northern Telecom was attracted to the No. 3 maker of computer networking products. IP is the language spoken by the Internet. It, for example, recognizes Internet addresses, letting people surf the Web and send electronic mail.
Companies and consumers are pushing for networks that make optimal use of IP technology, says Steve Pearse, Bay's executive vice president in charge of Internet/telecom.
''We think we're creating a $30 billion market within three years that didn't exist before,'' Pearse said.
Bay is preparing to introduce a volley of IP products for the ISP and carrier markets in the next year, he says. These include routers, switches, access concentrators and other products that let ISPs and phone carriers provide network services for companies and, to a lesser extent, consumers.
Bay already is shipping products to let companies create virtual private networks. One of the hottest areas in networking, VPNs enable companies to build networks using the less costly Internet rather than private phone lines.
Nortel's vast distribution organization will be key. ''We needed a powerful channel,'' Pearse said.
Santa Clara, Calif.- based Bay has turned to high-growth markets such as ISPs to bolster flagging sales to corporate customers. At the same time, industry leader Cisco Systems Inc. has moved further ahead, while 3Com Corp. has struggled in its No. 2 spot among computer networking companies.
''I think Bay has a shot,'' said Brad Baldwin, an analyst with Framingham, Mass.-based International Data Corp. ''They have good technology and a good message.
''They're the Avis of the networking industry. They're back there, but they're scrapping. They haven't given up.''
For its third fiscal quarter ended March 28, Bay said revenue rose 6.7% to $547.2 million, compared with the year-ago quarter. But its profit from operations fell to $9.9 million, or 4 cents a diluted share, from $20.7 million, or 10 cents.
In moving into the Internet market, Bay faces data networking rivals such as Cisco and Ascend Communications Inc. But it also faces makers of phone network gear. These include Nortel archrival Lucent Technologies Inc., the largest maker of phone network gear.
''I think that companies like Ascend and Cisco have a better lock on ISPs and (telephone companies) than Bay does,'' said Tam Dell'Oro, president of market researcher Dell'Oro Group in Portola Valley, Calif.
But she agrees that Bay must pursue Internet-related and wide-area network markets as sales for computer-related, local-area networks slow.
''It's getting tougher to make a buck in LANs,'' Dell'Oro said. ''It seems like the money is shifting over from LAN to WAN.''
Bay's been encouraged by the reaction of its customers to the Nortel merger, Pearse says.
''It simplifies their lives,'' he said. And Nortel's size will help Bay ''close deals that were more risky'' going it alone, he says.
Bay's goal is simple: to make IP-based networks more reliable, Pearse says.
''One strategy is to build the business-class Internet,'' Pearse said.
The merged companies also will make new products for this emerging market.
Bay's ISP/carrier strategy is ''absolutely textbook,'' said Dan Taylor, an analyst with Boston's Aberdeen Group Inc. ''Bay has addressed all of the major components. They're taking an attacker strategy.''
Bay bought privately held New Oak Communications for $156 million in January to boost its VPN offerings.
Nortel/Bay also could have a leg up in the area of ''signaling,'' Taylor says. Signals let voice networks know a call is on the network. It's basic, but tough to do well, he says.
Signaling technology can bridge voice and data networks, Taylor says. It's a version of call waiting for the Internet. It lets Web surfers stay online while taking a telephone call.
''Those sorts of call-waiting services'' can have very high profit margins, Taylor says.
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