Nortel Ups Network Ante By
Paying $7 Bil For Bay
Date: 6/16/98
Author: Michele Hostetler
The game of musical chairs surrounding Bay
Networks Inc. is over.
Northern Telecom Ltd. Monday ended several
years of rumors that someone would buy the
struggling No. 3 maker of computer networking
gear.
The Toronto-based maker of telephone network
gear said it would buy Bay for stock valued at
about $32.40 a share, or about $7.1 billion. In
yesterday's stock-market downdraft, Nortel's
shares slid 9 1 1/16, or 15%, to 54. Bay rose 2
7/16 to 30 3/4.
The two had valued the deal at $9.1 billion early
in the day.
It's the largest merger among voice and data
networking companies.
''This merger is really the first creation of a
company of this kind,'' Nortel Chief Executive
John Roth said in a call with reporters, referring
to the merger of a voice and a data company.
It also, apparently, was inevitable from Bay's
point of view. The company has been falling
further behind rivals Cisco Systems Inc. and
3Com Corp.
''Bay was running out of gas,'' said Brendan
Hannigan, an analyst with Cambridge,
Mass.-based Forrester Research Inc.
The networking industry is going through a lot of
change (See story next page). The lines between
wide-area networks and local-area networks -
as well as voice and data networks - have
blurred.
The largest voice equipment player, Lucent
Technologies Inc., is looking for more data
business. Analysts say Lucent also looked at
Bay. Meanwhile, Cisco covets the voice world.
''This merger perhaps spells trouble ahead for
Cisco,'' said John Armstrong, an analyst with
market researcher Dataquest Inc. ''And it will be
a wake-up call for (voice equipment makers) like
Siemens , Alcatel and Ericsson. With this
acquisition, Nortel has an advantage over them.''
Nortel sees Bay as the way to boost its
data-networking business. Bay is strong in
Internet Protocol - the language of the Internet.
IP is seen as the glue that will let voice, video and
Internet data travel on the same network.
''Basically, what we have there is a telephony
world turning into an IP world,'' said Larry
Howard, an analyst with Infonetics Research Inc.
in San Jose, Calif. ''I think it makes a lot of sense
to have one provider that offers both data and
voice.''
But there's no guarantee that Bay and Nortel will
be a happy union. Bay will become a subsidiary
of Nortel. Roth will be CEO of the combined
company. Bay's chief executive, David House,
will become president of Nortel. House was a
top Intel Corp. executive before getting the job
of turning around Bay in '96.
The Santa Clara, Calif.-based company is the
product of a big industry merger in '94. That's
when Boston area-based Wellfleet
Communications Inc. and SynOptics
Communications Inc. of Santa Clara merged.
The new Bay faltered because the company
missed some product cycles as the companies
ironed out the merger, analysts say.
A lack of product overlap will help Bay/Nortel,
says House.
''The integration of these companies will be
straightforward,'' House said in a conference call
with reporters.
Bay will give Nortel more ammunition against
Lucent and Cisco, says Lee Doyle, an analyst
with International Data Corp.
''It instantly makes Nortel a player in (data
networks), which otherwise was going to take
them awhile,'' Doyle said.
But Cisco still looms as a major force in the
market. ''I don't think the combination of Nortel
and Bay will make Bay stronger than Cisco,''
said Hannigan.
The Forrester analyst thinks there could be
problems. ''I would say it looks good on the
outside,'' Hannigan said. ''But it's not good on the
inside.''
All the pieces that Nortel needs to succeed in
voice-data integration aren't there, Hannigan
says. Nortel is weak in IP and Bay hasn't made
inroads into big accounts with its IP products, he
says.
''Where Nortel needs the most help, there's a
hole big enough to drive a truck through,''
Hannigan said.
But Nortel could help Bay's sales to telephone
carriers and Internet service providers, Doyle
says. ''Bay has some products there, but did not
have the presence to get to service providers,'' he
said.
Nortel says it expects to complete the Bay
purchase next quarter. But Nortel's rivals aren't
standing still. Lucent, L.M. Ericsson Telephone
Co., Siemens, Cisco and Alcatel are expected to
make acquisitions.
''The question is: How does Lucent respond to
this?'' Doyle said. ''Who's left on the table?''
Plenty of smaller companies, responds Virginia
Brooks, an analyst with the Aberdeen Group in
Boston. They include data- networking
companies Ascend Communications Inc. and
Cabletron Systems Inc. Like Bay, Ascend and
Cabletron have been subjects of persistent
acquisition rumors.
''I don't think it's crazy to think Lucent would buy
both Ascend and Cabletron,'' Howard said.
3Com seems to be the lone big player that's not
the subject of takeover talk.
''You don't hear much talk about 3Com being
bought,'' Howard said. ''Maybe they're just too
big to swallow. Maybe it's possible that 3Com
would make some move with Ascend.''
Also, 3Com has had troubles digesting its big
acquisition last year of U.S. Robotics Corp. And
3Com already has a strong relationship with
Siemens.
Indeed, 3Com could build on its relationship with
Siemens, says 3Com spokesman Bob Ingols.
''It's not part of our strategy to merge with
Siemens right now,'' Ingols said ''But in this
topsy-turvy world, you can't rule anything out.''
Bay and Nortel, meanwhile, must move quickly
to meld their two cultures, Aberdeen's Brooks
says.
'' 'We look at the world the same way,' (both
Bay and Nortel say). But this is more like when
worlds collide,'' said Brooks.
(C) Copyright 1998 Investors Business Daily,
Inc.
Metadata: BAY NT CSCO COMS LU ERICY INTC
ASND I/3574 I/4890 I/3675 E/IBD E/SN1 E |
