8/10/98 Electronic News article [ASND exec says it may announce 2+ acquisitions within next 3-6 months - see the last paragraph]
[This doesn't sound good short-term. Is the LU takeover premium history? I'm out.]
Excerpt: "Ascend, which has made eight acquisitions in two years--including last year's purchase of Cascade Communications Corp.--has a few more acquisitions up its sleeve. Mr. Fehrnstrom
added there are at least two other acquisitions that could be announced within the next three to six months, all of which should complement the company's existing business. "It's our intent to be
one of the top four telecom companies in the next few years," he said."
sumnet.com
From the Finance pages of Electronic News: August 10, 1998 Issue
Ascend Acquires Stratus
An $822M deal for Stratus' telecom division which makes SS7 switches; plan
for carriers to get integrated product for voice, data networks
By Heidi Elliott
Marlboro, Mass.--In a deal that surprised some and puzzled others, Ascend Communications
Inc. last week acquired Stratus Computer Corp. in an $822 million tax-free stock-for-stock deal.
Ascend purchased Stratus for its telecommunications division, which makes SS7 switches. These
switches, combined with Ascend's own IP and ATM products, will give telecom carriers an
integrated product for voice and data networks. Ascend will jettison the remaining divisions of
Stratus, it hopes, by the end of the year.
In announcing the acquisition, Ascend President and CEO Mory Ejabat said, "This combination
offers a new architecture for telephony networks...Our products, combined with Stratus' SS7
switches, OSS software and fault-tolerant platform, allow network services providers
cost-effective, reliable and transparent means to relieve congestion while reducing operating costs
on the Public Switched Telephone Network (PSTN), facilitate the integration of voice, fax and
data traffic networks through multi-service ATM switches, and provide new services to end users
such as Internet Telephony (fax and voice over IP), utilizing remote access switches."
The deal, leaked to the public before the official announcement, initially sent Ascend stock down
$7 a share, or 14 percent, as word of it buying a computer company left some analysts
perplexed, and company officials could not comment. "We knew if it got out that Ascend was
buying a computer company there would be a bad reaction. The story got out there without us
explaining why and we couldn't," said Ascend Senior VP of Business Development Ken
Fehrnstrom. Added Ali Kafel, Director of Telecommunication Marketing at Stratus, "People
know us as just a computer company. We are more than just a computer company."
And, after last Monday's official annoucement and the accompanying explanation by
management, the stock began recovering. As of Friday morning, Ascend stock traded at
$48-3/4, up from the previous Friday's close of $44.47. Stratus stock on Friday morning traded
at $35-1/8, up from the previous week's $28.87.
Mr. Fehrnstrom explained the company bought Stratus for one of the four divisions, the telecom
carrier business which includes SS7 switches, Operations Systems Software (OSS) and
fault-tolerant platform. With the SS7 intelligent phone network switches, OSS and the platform,
Ascend can offer an integrated voice and data network. The remaining Stratus divisions are its
Enterprise Computing division and two software units, which Mr. Fehrnstrom believes can be
divested in short order "so we're left with the crown jewel of Stratus," he said. "Nobody had
figured out their potential, so we swooped in."
That "potential" was announced in March, when Stratus unveiled its intent to define an open
Internet Intelligent Network (IN) architecture capable of handling large amounts of Internet traffic
that telecom carriers would be required to handle. At the time, Stratus was working with large
carriers, including MCI, and network access equipment vendors, including Ascend, to specify an
open, industry-standard platform. Stratus' job was to supply the core fault-tolerant processor and
carrier-class telecommunications middleware for the new Internet Service Control Point (SCP)
platform.
"What we really saw was an opportunity where we could provide the 'brain' to the dumb data
switches to connect them to the public telephone network," said Mr. Kafel. "We started to talk to
(business partners) about it, and Ascend took it one step further. What this really gives us is 100
percent commitment to a switching technology, more than just a traditional partnership."
Stratus and Ascend executives also believe the merger opens up a $10 billion market for the new
Ascend to bridge the data and voice networks, in a market served primarily by traditional
telecom equipment suppliers.
The deal, where Stratus stockholders are given a .75 share of Ascend stock, or $33.35 per
share, will be accounted for as a purchase. There will be a $300 million to $350 million charge
for R&D write-offs and $80 million to $100 million charge related to the restructuring, taken in
the fourth quarter of the year. The deal is expected to close by the end of the year. In addition to
the downsizing of 350 employees already announced by Stratus, the merger should eliminate
another 150 positions. However, Stratus will not be taking the previously announced $20 million
restructuring charge in the current quarter.
Though the initial leak brought Ascend's stock down, Mr. Fehrnstrom contends it was a great
bargain. Subtracting Stratus' $277 million in cash, Mr. Fehrnstrom said, brings the cost of the
deal down to $550 million. Then, taking into account the three divisions to be sold that had a
combined revenue total of $400 million, the resulting purchase price for Stratus is $150 million.
Comparing that figure to the $200 million in expected sales this year, Mr. Fehrnstrom called the
acquisition "a sweet deal." Also, Ascend executives expect a growth rate of 20 percent for
Stratus in 1999. On the sale of the other divisions, he said, "even if we're incredibly conservative,
we could sell those (divisions) at a fire sale and be okay."
Ascend, which has made eight acquisitions in two years--including last year's purchase of
Cascade Communications Corp.--has a few more acquisitions up its sleeve. [What?] Mr. Fehrnstrom
added there are at least two other acquisitions that could be announced within the next three to
six months, all of which should complement the company's existing business. "It's our intent to be
one of the top four telecom companies in the next few years," he said. [Shouldn't this say telecom equipment supply company. I thought ASND was a data networker, not a telecom company. Am I missing something?]
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