Ottawa Citizen
Monday 20 July 1998
Newbridge at the crossroads
Industry consolidation makes high-tech firm
a takeover target
James Bagnall
The Ottawa Citizen
Newbridge Networks Corp. is heading into
what promises to be the most crucial period of
its 12-year history.
The industry in which it operates is rapidly
consolidating into a handful of giants, thus
increasing the likelihood that Newbridge itself
could be acquired in the near future. It's either
that, or risk becoming a relatively small player
in a universe of behemoths.
For Ottawa-area residents used to thinking of
Newbridge as a major global player, either
prospect would likely come as a surprise.
Newbridge, which makes high-speed data
networking gear, can still thrive as a
stand-alone company. Indeed, that remains the
goal of its founder and chairman, Terence
Matthews, who owns 21 per cent of the company.
Ever since he founded Newbridge, Mr. Matthews has been a champion of the
notion that home-grown firms can make it on the global stage. The
Welsh-born entrepreneur has even used his personal venture capital firm,
Celtic House International, to help fund regionally based startups that might
otherwise have relied on foreign-based investors.
Retaining Newbridge's status as a stand-alone company will mean fighting
against the industry's growing trend toward corporate concentration.
In the wake of last month's $9.1-billion U.S. purchase by Northern Telecom
Ltd. of California-based Bay Networks Inc. -- the fourth major acquisition in
the networking sector in the past two months alone -- Newbridge now finds
itself occupying an increasingly lonely tier in its industry.
Newbridge, along with Cabletron Systems Inc. of Rochester, New
Hampshire, and Ascend Communications Inc. of Alameda, California, is one
of a handful of networking firms that in the past year each generated revenues
of between $1 billion U.S. and $1.4 billion U.S.
In terms of sales, this group is now some distance from the industry's top tier,
which is dominated by giants such as Lucent Technologies Inc. of Murray Hill,
New Jersey, Cisco Systems Inc. of San Jose, California and Nortel. Their
revenues ranged from $7.8 billion U.S. to $28.2 billion U.S. during the most
recent four quarters.
Size matters in this industry because its customers are among the world's
biggest telephone companies, cable firms and Internet service providers.
These providers of communications services are set to spend an estimated
$380 billion U.S. over the next eight years to accommodate the fantastic
growth in electronic traffic generated by the Internet.
Indeed, France Telecom, Deutsche Telecom and Sprint Communications
Corp. are all expected soon to reveal who they'll pick to build their new,
high-speed networks.
In adapting to the world of the Internet, they are contemplating revolutionary
changes. Not surprisingly, they want every assurance that the firm that sells
them these networks will be around for years to come. And size gives them a
lot of comfort on this front.
At first glance, Newbridge looks well placed to take advantage of this
once-in-a-lifetime opportunity.
A good chunk of this spending -- anywhere from 25 per cent to 50 per cent
-- could involve a technology known as asynchronous transfer mode (ATM),
which happens to be Newbridge's specialty.
And, for the past few years, Newbridge has held a clear global lead in this
market, with a 34-per-cent share in 1997, according to California-based
Dataquest Ltd. That's up from 28 per cent in 1996.
"ATM is hot," Mr. Matthews said in a conference call last month following the
release of his company's annual results. "The fourth quarter was the 10th
straight quarter of record revenue for ATM products."
For the past two years, Newbridge has also had a wide-ranging alliance for
research and development and marketing with Munich-based technology giant
Siemens AG. California-based 3Com Corp., a computer networking firm,
joined the alliance last autumn.
The company has long maintained that such a partnership easily has the same
amount of heft as the industry's other giant players. However, Newbridge's
position is not impregnable.
For one thing, a significant portion of the spending on ATM gear to date
reflects purchases by customers interested in testing and evaluating ATM
equipment.
Now, the sheer scale of the unfolding market has prompted new competitors
-- such as Cisco, Nortel and Ascend -- to develop top-of-the-line ATM
equipment of their own.
It's also important to note that ATM is a packet switching technology (which
means data is sent in the form of packets) that also includes frame relay. Sales
of packet switches provide a broader measure of the strength of data
networking companies.
And this race is a close one. Lee Doyle, vice-president of International Data
Corp., of Framingham, Massachusetts, says Newbridge retained its lead in
1997 with a 22-per-cent share of the global market in packet switches.
But Cisco, with a 21-per-cent slice, and Nortel, at 19 per cent, were nipping
at its heels.
Newbridge's alliance with Siemens and 3Com is a departure from the
industry's norm in that the three partners have not purchased significant equity
in one another. A key question is whether the firms can continue to satisfy
major buyers that the partnership will not one day dissolve.
Indeed, one of the main reasons Nortel bought Bay Networks was to set
aside any doubt about its long-term commitment.
When asked earlier this month by LANTimes, a respected U.S. trade
magazine, why he didn't form a partnership, Nortel CEO John Roth said:
"Partnerships are not a good way to build long-term strategic plans. We don't
want to build those types of dependencies on a company that might not
always be our partner.
"Also, partnerships do not have the same degree of urgency on both sides."
The Siemens-Newbridge alliance has been a successful one. Newbridge relies
on Siemens distribution channels to generate roughly 15 per cent of its annual
sales. The two firms also do a considerable amount of joint development on
ATM technology.
However, Siemens' telecommunications group isn't considered to be a
powerhouse in the U.S. market on the scale of Lucent or Cisco. And U.S.
contracts are expected to account for a key portion of the early spending on
data switching technology.
If Newbridge decides it needs help to buttress its position in the U.S., one of
the first signs could be a decision to re-negotiate its alliance with Siemens in
favour of a strong U.S. player. This assumes, of course, that Siemens itself
doesn't buy Newbridge.
Tom Nolle, president of CIMI Corp., a U.S.-based consulting firm, believes
such a move by the German colossus is unlikely. "It appears that Siemens has
determined it is not going to acquire Newbridge and that its alliance with
Newbridge will be re-negotiated," he says.
Such a move would make Newbridge a more attractive acquisition target.
Potential buyers have so far been reluctant to bid because it would be so
difficult to untangle the joint arrangements for research and development and
marketing between Siemens and Newbridge.
A wild card in any takeover would be the reaction of Mr. Matthews. In a
1996 interview with the Citizen, the Newbridge chairman laid out what his
response to a hostile takeover would be.
"I have sufficient worth," he said, "that I'd set a building up across the road
and clean out all (Newbridge's) engineering staff. And I have the ability to do
it. (The acquirers) would end up with a very nice set of glass and brick
buildings."
However, if Mr. Matthews senses that Newbridge's stand-alone position is
weakening its ability to land key sales, he may be forced to reconsider his
independence.
Neither Mr. Matthews nor company officials would comment for this article.
Some analysts believe Newbridge already suffers from a low profile in the
U.S.
"We survey buyer attitudes on equipment makers,'' says Mr. Nolle. "Since
last September, Newbridge has taken one of the biggest hits we've ever seen
in the U.S. market.''
Mr. Nolle attributes this opinion to two main factors. First, he says,
Newbridge lost some key U.S. marketing personnel following the early 1996
signing of the Siemens alliance.
Second, he adds, Newbridge announced a wide-ranging marketing strategy
last October known as Carrier Scale Internetworking but since then, it has not
been very visible.
Other analysts are more optimistic about Newbridge's long-term prospects.
Michael Neiberg, a technology analyst with New York-based securities firm
Furman Selz, recently upgraded Newbridge shares to a "buy'' based in part
on the recent appointment of Alan Lutz as chief executive and the company's
willingness to appoint three outsiders to the board of directors.
"Newbridge has a lot of strength in products and distribution,'' he says, "but,
for whatever reason, it just isn't being recognized (in the U.S.). Bringing in
fresh blood is going to help.''
Certainly Mr. Lutz -- a former senior executive at Houston-based Compaq
Computer Corp. and Mississauga-based Northern Telecom Ltd. -- is moving
quickly to put his stamp on Newbridge.
Among Mr. Lutz's favourite words these days is "accountability.'' He is
sending the message that if Newbridge executives can't meet sales and
production targets, then they'll be out the door.
Raymond Keneipp, principal analyst for Current Analysis Inc., a Sterling,
Virginia-based consulting firm, said one of Mr. Lutz's top priorities will be to
sell data networking switches to U.S.-based Internet service providers.
"Newbridge doesn't have a large presence in the ISP market today and the
top ISP companies will be making decisions about their backbone switches
over the next 12 to 18 months," he said.
A higher U.S. profile would help Newbridge on this front. But it's also a
two-edged sword because Newbridge would very quickly start showing up
on the radar of its larger competitors.
"ATM is absolutely essential for tomorrow's networks. It's here now and
Newbridge can deliver it," says Francis McInerney, a telecommunications
analyst with the New York-based consulting firm, North Rivers Ventures Inc.
"This means Newbridge has value to another company and unquestionably
makes them an acquisition target."
It would be a pricey purchase. Newbridge's market value at the close of
market Friday on the Toronto Stock Exchange was nearly $6 billion. And a
bidding war would almost certainly drive the price much higher.
Assuming Newbridge does come into play, who would be a logical buyer?
Mr. Neiberg, the Furman Selz analyst, thinks Lucent is a possibility. "Lucent is
looking for big switches of the sort Newbridge makes," he says.
But Mr. Keneipp and Mr. Nolle are dubious. "Lucent already has a strong
relationship with GDC and (Illinois-based) Tellabs Inc.," says Mr. Keneipp. "I
also think they'll be building their own backbone ATM switches."
Mr. Nolle notes: "I don't know why Lucent would pay $1 billion U.S. for
Yurie Systems Inc. (an ATM switch maker bought by Lucent in May) then go
out and buy Newbridge."
His best guess for a Newbridge acquirer: Swedish telecommunications giant
L.M. Ericsson. Another possibility, he adds, is a merger between Newbridge
and 3Com.
Would Mr. Matthews sell? Put it this way: If Newbridge starts to show signs
this fall of winning some major business, it may find one of the industry's real
heavyweights at its door -- sporting an acquisition offer rich enough that not
even Mr. Matthews can refuse.
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Let the games begin
Regards
Glenn |
