The Wires: Investors Fret, Cut Nortel 12%, But Bay Deal Is Praised
{Doug, this is an earlier DJ article which you may be interested to read]
June 15, 1998 2:27 PM
By Shawn Young
NEW YORK (Dow Jones)--Northern Telecom Ltd.
(NT) will round out a key product line by buying Bay
Networks Inc. (BAY) in a stock deal valued at $9.1
billion, but investors took their worries about Bay's
earnings out on its would-be parent Monday.
By agreeing to buy Bay, Northern Telecom, a
Brampton, Ontario, telecommunications equipment
maker, strengthens its standing in the data networking
market that is increasingly important as the distinction
between data networks and conventional phone
networks begins to collapse.
Buying Bay helps position Northern Telecom, known as
Nortel, to hold off assaults on its market by data
networking giant Cisco Systems Inc. (CSCO). The
acquisition also comes as Nortel's biggest competitor,
Lucent Technologies Inc. (LU), takes aim at the data
networking market.
Sprint Corp. (FON), the nation's third-largest
long-distance company, recently bypassed Nortel and
Lucent to select Cisco as lead vendor for a massive
network upgrade.
"A lot of the equipment vendors are really nervous about
Cisco," said Furman Selz Inc. analyst Michael Neiberg.
"The telecom equipment guys want to make sure they
have a full line of products.
"The big companies feel they need to do everything,"
Neiberg added.
The Bay deal puts Nortel in a good position to cope
with the changes taking place in an industry that
suddenly finds itself in the throes of a consolidation
craze. Earlier this month, Tellabs Inc. (TLAB) agreed to
buy Ciena Corp. (CIEN) for $7 billion, Alcatel Alsthom
(ALA) took out DSC Communications Corp. (DIGI)
and World Access Inc. (WAXS) agreed to merge with
Telco Systems Inc. (TELC).
Nortel's announcement follows weeks of rumors that it
was in talks with Bay, which had been regarded as
takeover bait since it failed to hit earnings targets in
March. The Santa Clara, Calif., data networking
company has fallen short of analysts' earnings estimates
in five of the last nine quarters.
Concern that Nortel won't be able to turn Bay into a
consistent financial performer helped knock Nortel's
NYSE-listed stock down 7 11/16, or 12.1%, to 56 on
volume of 5.1 million. Average daily volume is 806,600.
The merger announcement boosted Bay's NYSE-listed
shares 3 7/16, or 12.1%, to 31 3/4 on volume of 12.4
million, compared with a daily average of 5.3 million.
"The market is worried about whether Nortel can
execute with Bay and use it to their advantage," said
ABN AMRO Inc. analyst Kenneth Leon.
"With Bay the level of confidence obviously hasn't been
there," Leon said.
No Details Yet On Charges
Nortel didn't specify the charges it expects to take from
the acquisition with Bay Networks, saying it is still
working out the details. Nortel is accounting for the deal
as a purchase. It isn't touting the deal as a money-saver,
instead officials of both companies stressed that their
businesses are complementary.
The companies said they have compatible,
technology-based cultures.
But some analysts aren't so sure. Pay scales are different
and telecommunications equipment makers tend to work
a little more slowly than data networking companies,
analysts said. Then there is Bay Networks' spotty
earnings history.
Problems integrating the acquisition could be
considerable in the short term, and that is part of the
reason Nortel's stock is being battered more than usual
for an acquirer, analysts said.
"In the long run, we're going to look back on this and
say it was a good move," said Gregory Geiling, an
analyst at J.P. Morgan Securities Inc.
"The whole game right now is Lucent and Cisco versus
everybody else," Geiling said. The Bay Networks
acquisition will help keep Nortel competitive with its two
giant rivals.
Even though data networking is already a $1 billion a
year business for Nortel, it "obviously needed a stronger
product line in data networking," said Leon of ABN
AMRO.
The company was under some time pressure. In
October Lucent will be free from restrictions linked to its
spinoff from AT&T Corp. (T) that bar it from using
pooling-of-interests accounting for mergers. When that
restriction lifts, Lucent can do bigger deals than it has to
date.
"This was Nortel's window of opportunity to get Bay,"
Leon said. Company officials said in a conference call
that they began talking to Nortel about a merger "a few
months ago."
As merger mania seizes the industry, a likely next target
could be Ascend Communications Inc. (ASND), which
might be attractive to Lucent or the combined Tellabs
and Ciena, analysts said.
Investors need to look critically at upcoming mergers in
this sector to make sure they are solidly grounded and
aren't chiefly motivated by frenzy or anxiety about all the
good partners being snapped up, an analyst said.
-Shawn Young; 201-938-5248 |
