Article from the Globe and Mail
Newbridge unveils major restructuring
Creating three business units to make it more agile
Wednesday, July 29, 1998
By Mark Evans and Tyler Hamilton
Technology Reporters
Newbridge Networks Corp. unveiled an extensive corporate restructuring yesterday that it hopes will
help it avoid the strategic mistakes that have plagued it in recent years.
The Kanata, Ont.-based telecommunications equipment maker announced the creation of three new
business units -- a move it says will boost revenue to $5-billion by 2002 from $1.6-billion in the fiscal
year ended April 30, 1998. The company also overhauled senior management with the promotion of
three Newbridge executives to head up each unit.
The sales target is ambitious, analysts say, because they believe Newbridge is losing momentum as rivals
such as Northern Telecom Ltd. of Brampton, Ont., make major acquisitions to offer a wider array of
products.
Newbridge has acknowledged it has stumbled, and is moving to right its fortunes. Last month, Compaq
Computer Corp. executive Alan Lutz was named president and chief operating officer and
Newbridge's board of directors was shuffled.
"I'm not trying to suggest what we did in the past was good or bad," Mr. Lutz said. "The company is
going through a natural transition from a technology-driven, entrepreneurial firm to one that if it wants to
play with the big boys has to focus on execution."
Investors adopted a wait-and-see approach yesterday as Newbridge shares dipped 15 cents to $30.65
on the Toronto Stock Exchange. The stock is still far below its 52-week high of $95 reached last
October.
A key issue is whether the moves made by Newbridge are enough to right the company, which has
about 6,500 employees, most of them in Kanata.
The new business units, which separate its switching, access and Internet product groups, are aimed at
making it more mobile and agile. Mr. Lutz said an important component will be better marketing, and a
new executive vice-president will be hired from outside the company to oversee those activities.
Sales were nearly flat in Newbridge's third quarter, but the company's revenue dropped 10 per cent in
the fourth quarter, falling to $395.2-million from $441.3-million a year ago. Its operating profit sank
even more steeply, declining to $32.6-million in the fourth quarter from $67.2-million a year ago.
If Newbridge can jump-start revenue and profit, analysts say, it could survive as a stand-alone entity. If
new management fails and the stock stays low, a takeover could be just a matter of time. Newbridge is
worth $5.3-billion based on yesterday's closing stock price.
"I think Newbridge has good technology, execution has been an issue," said Patrick Houghton, an
analyst with Wheat First Butcher Singer in Richmond, Va. "[Newbridge chairman and largest
shareholder] Terry Matthews is letting Alan Lutz put his mark on the company and do what he thinks
needs to be done. The question is, is it enough, fast enough and hard enough?"
The root of Newbridge's woes goes back to December, 1996, when it purchased equipment distributor
UB Networks Inc. of Santa Clara, Calif. for $96-million (U.S.). Newbridge wanted UB to penetrate
the corporate market and reduce its dependence on the telephone carrier market.
It proved to be a strategic disaster. Soon after the purchase, two of UB's largest customers --
Newbridge competitor Cisco Systems Inc. of San Jose, Calif., and Houston-based Compaq -- walked
away and Newbridge was unable to break into the market against strong competitors like Cisco.
"The UB Networks acquisition was a huge distraction for management," said Dave Powers, an analyst
at St. Louis-based Edward Jones, which still has a "hold" recommendation on Newbridge's stock.
Mr. Powers said that at the same time Newbridge was trying to fix UB Networks, competition heated
up in the company's core market for asynchronous transfer mode (ATM) switches. He said the
company wasn't aggressive enough in pursuing new market opportunities.
While Newbridge was making small acquisitions, many of its competitors were using their high-flying
stocks to make much larger purchases. Northern Telecom, for example, bought Winnipeg-based
Broadband Networks Inc. for $586-million (Canadian) last year and Bay Networks Inc. of Santa
Clara, Calif., for $9.1-billion (U.S.) last month.
Many analysts now wonder whether Newbridge is an acquisition candidate. Mr. Houghton said
Newbridge could become a candidate if its stock continues to languish around $20 (Canadian). Among
the potential suitors, he said, could be Northern Telecom, Sweden's L.M. Ericsson Telephone Co. Inc.
and Lucent Technologies Inc. of Murray Hill, N.J.
The idea of a takeover would have been heartily rejected by Newbridge a couple of years ago. Today,
however, even the company admits it's a possibility.
"If somebody comes forward next week and offers $50 a share, I have a financial responsibility to take
that to the board. They couldn't do it as an unfriendly bid, it has to be friendly," said Mr. Lutz, adding
that Newbridge isn't holding discussions now.
Paul Silverstein, an analyst with BancAmerica Robertson Stephens in New York, said Newbridge has
"staying power" in the near term and the company shouldn't seek a suitor until its share price rebounds.
"Perhaps it should be acquired, but not at this price, not today. Alan [Lutz's] first mission is fixing the
company."
NEWBRIDGE SWITCHES STRATEGY
The Kanata-based telecommunications maker faces tough competition in its core
business.
Worldwide for ATM switch market
Profected growth worldwide for ATM switch is 37 per cent from 1998 to 1999.
Total, '97: $3.1-billion (U.S.)
Cisco 28.4%
Newbridge 18.8%
Nortel 15.2%
Ascend/Cascade 12.8%
Fore Services 9.6%
Others 22.5%
Source: IDC Canada
Regards
Glenn
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