Excellent comments from Joe Noel H&Q analyst....''It's a major blunder that Cisco didn't buy this,''
Ascend to Buy Stratus Computer for $948 Mln in Stock (Update4)
Ascend to Buy Stratus Computer for $948 Mln in Stock (Update4) (Updates with closing share prices, value of transaction.)
Alameda, California, Aug. 3 (Bloomberg) -- Ascend Communications Inc., which sells computer switches that meld data and voice communications, agreed to buy Stratus Computer Inc. for $948 million in stock to boost its offerings to phone companies.
Ascend will pay 0.75 share for each of Stratus's 27 million shares, valuing Stratus shares at $35.11 based on Ascend's closing price today. Ascend rose 2 11/32 to 46 13/16 in trading of 20.4 million, making it the most active U.S. stock. Stratus rose 4 7/8 to 33 3/4 in trading of 9.34 million.
Stratus makes equipment and software that help the Baby Bells run their networks. Ascend now can sell those products to the Bells and other Internet providers looking for ways to squeeze more capacity from phone lines. Smaller networking companies like No. 5 Ascend need to bulk up their offerings to compete with Lucent Technologies Inc. and Northern Telecom Ltd. in the fast-growing market. ''You have to have this technology to be a player,'' said William Rabin, an analyst at J.P. Morgan Securities Inc., who has a ''buy'' rating on Ascend.
Although Ascend shares toppled 14 percent Friday on concern about a Stratus purchase, they rebounded today after Ascend's management said it will sell parts of Marlboro, Massachusetts- based Stratus by the end of the year.
Investors pushed Ascend's shares higher during the past two months amid expectations that Ascend itself would be taken over. Sweden's Ericsson AB, the world's No. 3 cellular telephone maker, said in June it was in talks with Ascend.
The Stratus purchase may make an acquisition of Ascend more expensive and more complicated, as the companies work to mesh their products, development teams and sales force.
Ascend President and Chief Executive Mory Ejabat said that while the company plans to ''chart its own destiny,'' buying Stratus gives it ''more of the technology that telecom (equipment) companies want to acquire.''
Combined Company
Ascend is moving to keep up with larger rivals like Lucent in the market for networking equipment sold to phone companies, which want new products to offer business customers more sophisticated Internet services. Those services, which include combining voice, video and data communications, will be delivered over networks controlled by powerful computers and software like the products made by Stratus. ''The transaction opens up a $10 billion new market opportunity for Ascend's products now served almost exclusively by traditional telecom-equipment suppliers,'' Ejabat said in a statement.
The purchase also gives Ascend an edge in the race against Cisco Systems Inc. and other networking equipment makers to build stronger links to large phone-company customers that spend billions of dollars upgrading their networks. ''It's a major blunder that Cisco didn't buy this,'' said Joseph Noel, an analyst at Hambrecht & Quist, who has a ''buy'' rating on Ascend.
Stronger Ties
The purchase gives Ascend stronger ties to the Baby Bells, some of the largest U.S. phone companies. ''Stratus is at the core of the Bell networks,'' Noel said.
Stratus is among only a handful of companies that make the sophisticated equipment, known as gateways, used to transfer data traffic between the Internet and the public switched telephone network, or PSTN.
In June, Ascend said it would begin selling gateway equipment made by Hewlett-Packard Co. to phone companies that want to free up their phone networks from burgeoning Internet traffic.
Ascend now will sell both the H-P and Stratus gear, said Ejabat, who called the Stratus products ''more fault-tolerant.''
Stratus, though, is struggling with weak demand in Asia. Last month it said it will cut 350 jobs, or 15 percent of its workforce, as it reported a second-quarter loss and a 20 percent drop in sales.
Shedding Units
Alameda, California-based Ascend said it will sell Stratus's divisions that make software for financial companies by the end of the year. Several ''interested parties'' have expressed an interest in the divisions, said Ejabat, who declined to give more details.
The decision to sell Stratus' non-networking divisions ''will lessen the concerns'' of investors that the purchase will dilute Ascend's earnings this year, said Martin Pyykkonen, an analyst with CIBC Oppenheimer, who rates Ascend ''buy.''
The company expects the Stratus purchase to add to earnings in 1999, boosting them to $1.70 a share next year on combined revenue of $2.3 billion, Ejabat said. Analysts expected $1.60 a share, according to First Call Corp.
Yet Ascend will achieve that higher figure only if sales of Stratus products to phone companies lead to more sales of Ascend equipment to those same accounts, Pyykkonen said. ''They need to prove it,'' he said.
The profit margin on Stratus equipment is only about two- thirds that for Ascend equipment, so higher revenue from Stratus sales will be offset by lower overall margins, Pyykkonen said.
Ascend will take charges of $300 million to $350 million for research and development and $80 million to $100 million for acquisition expenses in the fourth quarter related to the purchase. The purchase is expected to be closed by mid-October, Ejabat said.
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