August 3, 1998
Ascend Agrees to Acquire Stratus
In Stock Deal Worth $822 Million
An INTERACTIVE JOURNAL News Roundup
Ascend Communications Inc. agreed to buy Stratus Computer Inc. in a
stock deal worth about $822 million that is another sign of how the
Internet is changing telecommunications.
Ascend, based in Alameda, Calif., agreed to exchange three-quarters of
an Ascend share, which translates to about $33.35, for each share of
Stratus, of Marlboro, Mass. Based on Friday's closing prices for the two
stocks, the purchase price represents a 15% premium for Stratus
shareholders. But earlier last week, when the negotiations were at a critical
point, the premium had been closer to 80%.
Ascend's purchase of Stratus marks another step in the ongoing
convergence of voice and data networks and the resulting consolidation
among the companies that make the equipment to run them. The deal was
announced Monday, following a week of rumors about a deal between the
two companies.
Ascend to Sell Off Units
Although Stratus has four separate businesses, Ascend is interested in --
and plans to keep -- only one: Stratus's Telecom Carrier unit, which gives
Ascend an important product offering that allows carriers to integrate voice
and data networks.
Telecom Carrier makes specialized switches, computers able to run 24
hours a day, and software used to operate the Signaling System 7, or SS7,
network, a network that manages and controls phone networks.
The SS7 network allows phone companies to provide reliability as well as
value-added services like credit-card verification, caller identification, call
forwarding and 800-number calling, said Nationsbanc Montgomery
Securities analyst Alfred Tobia.
Sanford C. Bernstein & Co. analyst Paul Sagawa explained that for a
carrier to provide Internet telephony and offer the same quality and range
of services as a phone company, "it has to be able to seamlessly interact
with SS7."
The Telecom Carrier business therefore gives Ascend an important
product offering for carriers seeking to offer competitive
Internet-telephony services.
May Derail Lucent Bid
Still, Mr. Tobia said the acquisition will change investors' perception of
Ascend -- which, until now, has been viewed as a solid grower and as a
likely acquisition target itself.
Many are expecting Lucent Technologies Inc. to bid for Ascend once it is
free to do pooling-of-interest deals in October.
But now, Mr. Tobia said, investors are likely to focus on the merger
integration issues facing Ascend, including the planned divestiture of
Stratus' other three business. This, he added, could bring down Ascend's
price-to-earnings ratio.
Still, Mr. Tobia said he believes Ascend is "still an acquisition candidate,"
although it would be "more for someone to swallow."
If anything, Mr. Sagawa maintained, the purchase of Stratus makes
Ascend more attractive to Lucent since Lucent already purchases some
products from its Telecom Carrier business.
Most of the world's largest phone companies use Stratus' products. All of
the phone carriers have their own SS7 networks, but they are
interconnected.
Ascend's shares climbed $2.3438 to $46.8125 in heavy trading on the
Nasdaq Stock Market Monday, while Stratus's shares gained $4.875, or
17%, to $33.75, also in heavy trading.
Consolidation in the Telecom Industry
Like Northern Telecom Ltd.'s planned acquisition of Bay Networks Inc.,
announced in mid-June, Ascend's purchase of Stratus comes at a time
when voice and data networks are converging as more and more voice
traffic travels over computer networks.
This trend is driving significant consolidation among phone-equipment
companies and data-networking companies as players on both sides try to
build their businesses to compete in this new market.
Looking at the purchase of Stratus, Mr. Tobia said investors may be
wondering why Ascend is purchasing the Telecom Carrier business
outright, rather than just licensing its technology.
"Why do they need the hardware?" he asked, noting that the Stratus
software can run on a standard Hewlett-Packard Co. machine and that the
technology is UNIX-based.
Mr. Tobia added, however, that Ascend likely feels that Stratus has
"brand equity" in its computers, which should prevent commoditization of
the hardware. In addition, he said, technical links between the hardware
and the software could create some selling advantages.
Investors' Choppy Ride
Stratus, always thought of as a niche player, has taken investors on a
choppy ride over the last year, but started to generate some excitement
last summer. The stock climbed to a year-high of $60.75 in early
September. Its telecommunications business grew by 30% in 1997, after
securing big bids from clients like NEC Corp. and Lucent.
Another reason analysts rallied behind Stratus was its new management
team. The company recruited Bruce Sachs from Bay Networks as chief
executive officer in May, and Maurice "Moe" Castonguay followed in
August as chief financial officer. The team was praised as stabilizing the
company and emphasizing growth areas, like telecommunications.
But in June, the company said it would lose $10 million, or 42 cents a
share, far below the profit of 72 cents a share that Wall Street was
expecting. Stratus blamed weak sales in Asia, but also said sales in the
U.S. and Europe were soft.
After that, Stratus shares plummeted, finally bottoming out July 9 at
21.4375 -- 65% below the high reached in September.
Analysts were shocked by the company's problems in the second quarter,
and some still aren't sure what happened. George Elling, an analyst at
Lehman Brothers Inc., said the disappointing performance may have made
the new management entertain the takeover idea.
"Their technology has always been good, and maybe they thought Ascend
could leverage it better than they were able to do on their own," Mr. Elling
said. |
