Dow Jones - Nortel, Bay Ntwks Merger Combines Cos. With Similar Visions
June 15, 1998 5:19 PM
By Joelle Tessler
NEW YORK (Dow Jones)--The planned merger of
Northern Telecom Ltd. (NT) and Bay Networks Inc.
(BAY) will bring together two companies that have
relatively different product lines and customer bases, but
share the same vision for the networking industry.
While Nortel is a giant in the telecommunications
equipment market and Bay Networks is a leading
vendor in the computer networking business, both
companies believe the future of networking lies in the
convergence of the two industries.
Nortel's planned acquisition of Bay Networks will
position the two companies to cross-sell voice and data
networking equipment to both vendors' customers, and
will enable them to combine their research efforts to
develop products that integrate both forms of
communication.
"Bay is all data and Nortel is all voice, but they are
coming together," said Lazard Freres analyst Michael
Duran. "The product overlap is slight ... but they both
are headed in the same direction."
Northern Telecom earlier said it has agreed to acquire
Bay Networks for about $9.1 billion. Under the terms of
the deal, Bay Networks stockholders will receive 0.6 of
a Northern Telecom common share for each Bay
Networks share. Based on Nortel's closing stock price
of 63 11/16 on Friday, this would value Bay Networks
at $38.21 a share.
Nortel's NYSE-listed shares were recently down 7
11/16, or 12.1%, at 56, amid a sharp decline in the
overall market. Volume was 5.1 million shares
compared with an average daily volume of 806,600.
It's common for a suitor's stock to slip on the day a
merger is announced. But one analyst said he believes
Nortel's shares also are down because "there are plenty
of people out there who just don't like Bay" and believe
the company faces an uphill battle in competing against
networking giant Cisco Systems Inc. (CSCO).
Meanwhile, Bay Networks' NYSE-listed shares were
above their Friday close at 28 5/16, but well below $38
a share. The stock was recently up 3 7/16, or 12.1%, at
31 3/4 on volume of 8.3 million compared with an
average daily volume of 5.3 million.
Although some on Wall Street took this as a sign that the
deal may not go through, others noted that Bay
Networks' shares are simply trading close to what they
would fetch in the deal given Nortel's stock price
Monday. Going forward, the two stocks will trade in
lockstep, Duran explained.
Several analysts added that they expect Nortel's stock
to rebound, lifting the price that Bay Networks will
receive in the deal.
Noting that $38 a share represents a substantial
premium over where Bay Networks was trading Friday,
Duran said he believes the company is getting a fair
price. He said the takeover price is equal to about 2.7
times Bay Networks' sales based on results from last
quarter.
But Sanford C. Bernstein & Co. analyst Paul Sagawa
said Nortel is getting a bargain if the deal goes through.
He said he thinks Bay Networks believes it deserves a
premium equal to at least four times sales, or a price in
the low 40s.
Cos. Focused On Different Mkts
Nortel's proposed acquisition of Bay Networks would
merge two companies that are focused on different
markets and serve different customer bases.
To start, there is little product overlap between the two.
Although Bay Networks has been acquiring technology
to put voice traffic over data networks, the company
doesn't have a presence in the
telecommunications-equipment market.
And while Nortel said it does have a data-networking
business with a run rate of about $1 billion, it is mostly
focused on ATM and frame-relay switches, said
Sagawa of Sanford C. Bernstein. Bay Networks, on the
other hand, sells Ethernet-based products.
Although both companies do have some remote access
products, Hambrecht & Quist Inc. analyst Erik Suppiger
added that even these products don't overlap since
Nortel's product line - which it acquired through the
purchase of Aptis Communications Inc. in April - is a
higher-end offering than Bay Networks'.
The companies also sell to different customer bases. Bay
Networks largely provides local area data networking
equipment, selling mostly to corporate enterprise
customers. Nortel, on the hand hand, sells much of its
voice equipment to telecommunications carriers - in
other words, the wide-area-networking market.
There is some market overlap, however, since Bay
Networks sells equipment to some carriers and small
Internet service providers, while Nortel sells PBX
switches to enterprise customers.
Some analysts see the limited overlap between the two
companies in a positive light.
According to Sagawa, the purchase of Bay Networks
"helps Northern Telecom get into the LAN and the
enterprise and the Internet-focused carrier market." He
added that Nortel doesn't want to concede the
enterprise market to Cisco Systems Inc. (CSCO), the
giant of the data-networking industry.
In addition, said Duran of Lazard Freres, the two
companies' differing focuses position them well to
cross-sell their products into each others' installed
customer bases.
"There is sales synergy," Duran said, "because every
business, every phone company buys both voice and
data products."
But some analysts have said they aren't convinced the
combination makes a great deal of sense.
Forrester Research analyst Brendan Hannigan
questioned why Nortel wants to enter the competitive
LAN switching market.
Bay Networks is facing growing competition in the
market for low-end workgroup switches, for instance,
and has cut prices on its BayStack 350 switches to
pre-empt competition from Cisco and 3Com in fast
Ethernet workgroup switches.
In addition, the company's new Acclear Layer 3 switch
is also facing competition from Cisco's Catalyst 8500,
which it introduced in April.
In its most recently reported third quarter, the pressure
on Bay Networks' business was evident. Sales fell from
second-quarter levels in hubs, switches, routers and
remote access products.
And noting that Bay Networks is selling for less than he
expected, Sagawa questioned whether the purchase
price could signal that Bay Networks is in for another
disappointing quarterly report.
"I think Bay has run out of gas," Hannigan said.
Voice, Data Markets Converging
Despite the differences between the two companies'
businesses, Duran of Lazard Freres believes Northern
Telecom and Bay Networks share the belief that the
future of their industry lies in the convergence of voice
and data networks.
Because "these technologies are coming together" as
more and more voice and data traffic travel over the
same networks, the two companies should benefit by
joining their research teams to develop products that
integrate both, Duran said.
For instance, said Suppiger of Hambrecht & Quist, the
acquisition of Bay Networks will enable Nortel to bring
Internet Protocol technology to its carrier customers.
Still, even though "they've got the shared vision," Duran
sees potential pitfalls to proposed the merger. For one,
the companies could run into difficulties executing their
shared vision, particularly as they try to integrate two
large corporations.
Or "they could get there too late" because the
convergence between voice and data networking
technology is already well under way.
Monday's announcement ended weeks of speculation
that Nortel was interested in buying Bay Networks and
would make a formal offer for the company.
Bay Networks has been seen as a potential acquisition
target since it reported a disappointing fiscal third
quarter. A number of Wall Street sources have also said
Bay Networks has been shopping itself around in recent
weeks.
Although Nortel was the company repeatedly named as
the most likely suitor, Sagawa of Sanford C. Bernstein
said he believes other interested parties could yet
surface and wouldn't rule out the possibility of a bidding
war for Bay Networks.
He mentioned L.M. Ericsson Telephone Co. (ERICY)
and Lucent Technologies Inc. (LU), also big
telecommunications equipment makers, as well as Intel
Corp. (INTC) as possibilities.
- Joelle Tessler; 201-938-5285 |
