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Tuesday, June 16, 1998
US$9B Nortel deal panned
Jury still out on whether Bayworks is good fit or wrong technology at wrong price
By PHILIP DEMONT
Telecom Reporter The Financial Post
Teleglobe-Excel liaison 'marriage made in heaven'
That big market next door
Northern Telecom Ltd. bought Bay Networks Inc., the U.S.'s second-largest networking company yesterday, for US$9.1 billion in stock.
In a move designed to get a foothold in the data market, it offered US$38.21 in stock, or 0.6 of a Nortel share, for all the Santa Clara, Calif.-based firm's outstanding shares.
The move was panned by investors. Nortel shares (NTL/TSE) fell $13.60, almost 15%, to close at $79.50, while Bay Networks (BAY/NYSE) jumped US$27/16 to US$30 3/4.
The purchase gives the Brampton, Ont.-based switch maker access to important local area network technology and pushes it years ahead in the struggle to get into the data communications market, said chief executive John Roth.
Bay and its 7,000 employees will form a separate subsidiary, giving the Canadian company a total workforce of 80,000.
David House, Bay's chairman and CEO, will become Nortel's president, with Roth keeping the CEO title.
"The reason we're buying this is the technological know-how that Bay has," Roth said.
But investors and some analysts weren't impressed.
"It is a bad idea," said Maribel Lopez, network strategies analyst with Forrester Research Inc., a Boston-based research company. "Nortel bought a company that doesn't give it anything in the data world."
Last year, Nortel had revenue of US$15.5 billion, selling communications equipment to traditional and wireless phone carriers.
However, Nortel estimates that by 2000, data signals could make up 80% of communications network traffic. Many analysts say the company lacks the technology to move such signals around.
Bay makes products linking computers within a company's premises or between locations.
"Nortel was going to have to acquire this type of expertise," said Albert Daoust, director of special projects for Evans Research Corp., a Toronto-based research company.
In recent months, many equipment makers have reached the same conclusion.
This month, French telecommunications firm Alcatel Alsthom NV bought DSC Communications Corp., Tellabs Inc. purchased Ciena Corp. and World Access Inc. merged with Telco Systems Inc.
In March, Nortel paid US$290 million for Aptis Communications.
But the Bay purchase is its largest and most controversial.
Some industry watchers approved of the fit.
"If things remain on track, it's a pretty good deal," said Roger Wery, a telecommunications analyst with the San Francisco office of Renaissance Worldwide.
But he conceded some institutional investors disliked the deal, believing Bay only gives Nortel a way to sell gear to the US$30-billion company-specific, or "enterprise," market.
"They think we're buying this as a distribution avenue for our products," Roth said.
The deal also diluted the position of Nortel's existing owners.
If the purchase is approved by Canadian and U.S. regulators, Bay Network shareholders will end up with 21% of Nortel, holding 134 million new shares.
BCE Inc., Nortel's parent, will see its 51% ownership share drop to 41%. But the Montreal-based conglomerate said such dilution is a small price to pay for an improved Nortel.
"We feel that Nortel will be a much stronger company after this deal," said Don Doucette, a BCE spokesman.
Other investors were not as forgiving.
Nortel's earnings could drop by US10› to US15› a share in the fourth quarter because of the dilution, said Gurinder Parhar, a telecommunications analyst with HSBC Securities Inc.
As well, other stock watchers maintained, Nortel's share price was already too high to support its financial fundamentals.
"It's a big fall [yesterday]," said one. "But Nortel was overvalued before the acquisition."
Forrester's Lopez said the flaws with the deal extend beyond financial concerns. "It made the wrong choice."
In her view, it would have been better off buying Ascend Communications Inc.
Other analysts argued Alameda, Calif.-based Ascend would have cost US$5 billion to US$6 billion more and has not been in the business long enough.
"With Bay, you're getting a company that has made quality products for 10 years," Daoust said. "Ascend seems like a riskier player." |
