The Growth Imperative. [NN affiliates and BAY references]
telecoms-mag.com
In the cut-throat world of networking, if you're not growing, you are `greying'. Customers today demand open,
standards-compliant, multipurpose networks and to acquire the skills necessary and for delivering these solutions,
networking companies have had to broaden their traditionally narrow areas of expertise. Typically, acquisition of
new skills and products has occurred through acquisition of another, generally smaller, company. Sometimes, it is
also through the merger of apparently complementary companies. But is the frantic merger activity in the industry
actually benefiting networking companies? Is there a `good' or a `better' strategy when it comes to growing the
networking business quickly? Telecommunications International features the opinions of two leading players: one
a product of a high-profile and seemingly impossible merger which, recently, has itself been acquired; the other, a
company which has resisted the merger and acquisition bug.
Stephen Pearse and Dave Vant
July 1998
The Art of the Deal
Bay Networks, Inc. was formed in 1994 through the merger of SynOptics
Communications, Inc. and Wellfleet Communications, Inc., two leading data
communication vendors founded in the mid-1980s. At the time, it was the
biggest merger in the history of the datacoms industry.
Mergers and acquisitions present major challenges, which, in the case of Bay
Networks, meant merging two distinct corporate cultures, two companies
located on opposite coasts of the US and in different time zones, diverse
distribution channels and multiple product sets, development teams and
marketing strategies. Having learned the lessons of successfully merging two
corporate entities, Bay was uniquely positioned to embark on an M&A
strategy that is changing the face of the industry.
Eliminating Time and Distance
As markets have developed, a clear demarcation has come to be defined
between traditional corporate enterprise customers and a new customer base
comprising the emerging telecoms carriers and service providers. The service
and telecoms carriers are, in fact, a major new growth area. But solutions far
beyond the traditional `canned' approaches were needed to help Bay
become the network solutions provider of choice in the 21st century.
Just as the mainframe, minicomputer and PC industries were revolutionised
by changes in the marketplace, several new paradigm shifts in information
access are driving the evolution of the networking industry. These
fundamental market drivers include:
the boundaries of today's networks have been redefined and a new
global, electronically linked business community has emerged;
emerging applications like data mining demand ever higher levels of
network performance, availability and scalability;
heterogeneous networks abound with their multiple, incompatible
communications protocols. Therefore, the ability to use the IP networking
tools to dynamically change an adapt to traffic patterns and usage is critical.
As access boundaries disappear and users demand reliable, high-speed
access to more bandwidth-intensive applications, it has become obvious that
a more adaptive networking model is the only solution for both corporate
enterprise customers and for service providers. To this end, Adaptive
Networking is a concept that was pioneered at Bay to address the challenges
making the IP-optimised network a place of open interoperability, where
high-level services are provided even as network cost and complexity are
reduced.
Competition and `Co-opetition'
Bay set about finding the right solutions to achieve its strategic objective of
putting together all the building blocks for the Adaptive Network. But it
hasn't always been easy. There is fierce competition in the realm of mergers
and acquisitions, as a growing number of vendors seek to acquire `hot' new
technologies and products in order to position themselves as major players in
this fast-growing market. The great challenge for a company embarking on an
M&A strategy is to know not only what to acquire, but when to acquire,
when to invest, when to partner or co-operate and when to walk away. And,
let's not forget the all-important ability to manage the integration of multiple
raw technologies into leading business solutions.
One of the major factors contributing to Bay's success in this area has been
the ability to differentiate between the key technologies and peripheral
technologies. The company needed to bring certain critical hardware and
software components in-house and make them an integral part of our core
competency, which is building the IP-optimised networks of the future. At the
same time, it would seek external partnerships for product components that
only provided a more tangential part of the overall solution. In some cases,
this would mean investing in companies that were developing complementary
solutions; in other cases, it would mean partnering with our telco customers
and service providers to ensure that our adaptive networking offerings could
happily coexist with their solutions. Having a strategic plan against which to
measure and make these critical decisions was instrumental in Bay's success
and helped keep the business focused and to provide customers with
best-of-breed solutions.
The Sum is Greater than the Parts
To accomplish the goals that Bay set for itself, the process began in early
1995 and was further refined in 1996 when a new CEO, Dave House,
arrived on the scene. Acquisitions of remote access solutions, DSP modem
technology, cable modems solutions and extranet access switching, coupled
with investments in voice-over-IP providers were planned to bring the
solution together.
There are four main categories into which all of Bay's products, acquisitions
and technology partnerships fall: access, IP services, switching/routing and
network management. In the Internet/telecom business unit, the M&A
strategy is focused on finding products for the access and IP Services
categories.
With the first of our acquisitions, that of Xylogics, in 1995, we began building
the cornerstone of our Adaptive Networking suite. We started by keeping
Xylogics a separate business unit to minimise the impact of the merger on
ongoing R&D efforts. Over time, we took a fine enterprise technology and
transformed it into a carrier-class remote access solution that not only met,
but also exceeded the demands of our telecom and service providers in terms
of robustness and performance. Our next two strategic acquisitions took
place in late 1996, when we bought LANcity Corporation and Penril
Datability Networks:
LANcity was a leader in cable modem and data-over-cable technology; and
today we continue to strengthen and grow that market-leading position. With
this product offering, we now have the ability to penetrate a huge, growing
market segment of cable/broadband service providers as the demand for
high-speed access from consumers and businesses exploded. Leveraging
over a decade of experience in data-over-cable communications, Bay
Networks has integrated this proven edge technology with infrastructure to
provide an end-to-end data internetworking solution.
With Penril Datability we gained the industry's most advanced DSP-based
modems and remote access products. These software-programmable
modems were then integrated into the Xylogics platform, and Bay's Versalar
5399 Remote Access Concentrator was born. The DSP is also critical
component for delivering IP Services such as Voice-over-IP, and virtual
private networks (VPN). Through a successful M&A strategy, we can now
provide our customers with a flexible product that can be immediately and
easily upgraded in the field as new line speeds and services become
available.
1997 was another landmark year, a key component of our Adaptive
Networking IP Services cornerstone came from the acquisition of ISOTRO.
When we acquired ISOTRO, the NetID product was a leading IP address
management and DNS/DHCP management tool that greatly simplified the
administrative process of keeping track of and managing a fast-growing
number of IP addresses dynamically. The integration with Bay Networks has
resulted in a NetID product that not only provides IP address and
DNS/DHCP management capability, but also provides the platform for
directory services. With our partnerships with all directory providers
(Microsoft, Netscape and Novell), this significantly enhances our telecom
and service provider customers' ability to dynamically manage networks by
assigning rights based on users, groups and/or applications with NetID.
In 1998 we have been able to round out our IP Services offerings with an
additional acquisition and a partnership:
From the New Oak Communications acquisition, we acquired key enabling
services with the industry's broadest and most comprehensive Extranet and
VPN solutions. Branded the Bay Networks Contivity Extranet Switch family,
the products provide secure, dedicated remote access to corporate
resources for employees and business partners over the Internet -- without
having to deal with modems on the corporate site. This one-box solution
provides bandwidth management, security and directory services at the
enterprise; but with added development for management and provisioning of
these devices, the service providers can offer these value-added products as
managed network services.
Our joint development partnership with Netspeak brought with it
sophisticated, system-oriented voice-over-IP and fax-over-IP solutions for
our service provider customers, to whom it represents a major
revenue-generating opportunity. While existing solutions in the market today
concentrate on toll bypass applications, our partnership with Netspeak also
concentrates on the integration of voice, video and data from a systems
standpoint.
What's Next?
Because we are only now seeing the tip of the iceberg in terms of the overall
market potential, we view this as an ongoing process. With radical changes
continuing to take place in the technology arena and the market, our M&A
business model also needs to be adaptive as we move forward. We
understand that the scope and pace of change in the industry is increasing
dramatically each day. Given that, not only survival, but great success lies in
store for those service providers who are quick to respond to changes in
market requirements, able to grow with their customers and the networks
they service, and who are best prepared to compete effectively.
To service this market, we, in turn, must continue to identify industry-leading,
modular plug'n'play solutions that can be integrated easily into existing and
evolving network infrastructures. Networks that provide speed, scalability,
and efficiency at multiple levels and can adapt quickly to new technologies
and business models are the information highways of the future.
With our considerable and successful M&A track record, we have put
together a proven process for integrating new technologies and companies.
As we move forward, we are uniquely positioned to bring in the best
technologies and transform them into products and solutions that set the
standard for the entire industry. t
Stephen Pearse is executive vice president of Bay Networks and leads the
worldwide development and management of its products and services
supporting the Internet, telecoms, data-over-cable and remote access
markets.
Affiliates in Success
The climate within the carrier industry is highly competitive. The pressures of
deregulation, privatisation and globalisation come at the same time as
increasingly sophisticated services demanded by customers (as well as the
effect of the web) are pushing carriers (and large corporates) towards a total
change-out of core infrastructure. And that's expensive. If this were not
enough, the increasing commoditisation of data services leaves carriers in
danger of becoming undifferentiated `bit-haulers,' which is unsustainable in
the longer term.
What does this situation mean for a company like Newbridge, who supply
network infrastructure to telecoms carriers? Firstly, customers are looking for
innovations that they can sell to their customers as value-added services.
Secondly, they are looking to consolidate costs through using fewer
suppliers. Thirdly, they are looking for total solutions from their equipment
providers, so that they can offer flexible solutions around meeting their
customers' business problems. For Newbridge this adds up to the need to
consistently innovate across a broad range of products and product areas, so
that customers can continue to develop the services and network packages
that will keep them ahead.
Innovation: Make It, Buy It or Build It?
The question is, how does a company develop truly innovative solutions
across all the technologies which go to make up an end-to-end network.
Many companies try to develop in-house all the technology they are going to
need throughout their product and service range. While this is possible, the
bigger the company gets, the slower and more process-driven the R&D
tends to become, and the easier it is for smaller and more aggressive
companies to get ahead. A bigger danger though, is a loss of focus. Through
trying to develop across too many areas, a company can lose focus very
quickly, and soon fall behind in the area of their own core competence. (The
history of IT is littered with the bodies.)
Finally, internal start-ups tend to become starved of funds when cash-flow
gets tight. Such projects commence with massive enthusiasm and great
fanfare, then stumble and frequently die.
Many companies choose to innovate by acquisition. Small companies with
brilliant technology are bought and integrated into the offering of the buyer.
But there can be problems of culture and thus staff retention. And that's
assuming that there are no compatibility problems on the technical level.
Acquisitions need a great deal of effort on both sides to work, and are
fraught with pitfalls. And they are expensive. Figure 1 contrasts the costs of
the acquisition programme of some of Newbridge's competitors with the
affiliate programme.
So what is the third option? Newbridge has, since 1992, developed an
innovative and flexible strategy that offers comprehensive end-to-end
solutions while allowing it to concentrate on core networking solutions it does
best: a programme in which companies are affiliated to, rather than merged
with, Newbridge. The idea was conceived when a major US carrier needed
an urgent solution to its network management needs which Newbridge could
not fulfil in-house in the time allowed. Terry Matthews, founder and
chairman, suggested to the board that Newbridge help found an
entrepreneurial company separate from itself to carry out the development.
That company, CrossKeys, which made its IPO last year, set a trend for the
future. The model was so successful, that it has been repeated 19 times in the
succeeding five years.
When you acquire a technology, you have to make it work with your existing
products. Our affiliate companies, on the other hand, design their products
from the beginning to be part of a total Newbridge solution.
Bert Whyte, president of affiliate ACC says the company's award-winning
Tigris remote access concentrator was the product of just such a synergy.
Tigris started as a joint development between Newbridge and ACC. Over
time the technology and the process has been transitioned to ACC, but it's
still a team. In fact, Newbridge has now taken on the Tigris as an OEM
product of their own. This example illustrates one of the key advantages of
the affiliate programme; an extended R&D arm. Imagine over 1000
additional R&D engineers (from a total of 1600 employees) all working on
complementary, leading-edge technologies, while at the same time sharing
both the risks and the costs with other investors.
What are the risks? Venture capitalists know all too well that, on average,
eight out of ten start-ups will fail. Newbridge has 20 affiliates and the
programme is highly successful. None have failed.
Making affiliation work
For an affiliate to be successful, the new company needs to be working in an
area which is close enough to Newbridge's core business to be synergistic,
but, generally speaking, not close enough to be that core business itself.
Under the affiliate programme Newbridge holds equity, typically one third, in
the affiliated company, and has proportionate representation on the board of
the directors.
Rather than being absorbed into a larger structure, the managements of the
affiliates are encouraged to retain their independence while maintaining
corporate co-operation. The affiliate programme also safeguards the
management of Newbridge from the demands of organising a take-over, of
the resulting restructuring, and of simply controlling an over-extended
company. Newbridge is thus free to concentrate on product development
and customer service.
Expanding Portfolio
This family of dedicated affiliates has therefore increased Newbridge's
product breadth. It has done so, moreover, cost effectively, in terms both of
money and of managerial commitment. Newbridge has pursued an active
policy of assessing its customers' needs, and then investing in companies
developing those solutions. The policy of Newbridge is to get involved at or
soon after start-up, or at an early stage in the development cycle. This
ensures that the affiliate's products are designed for maximum interoperability
with those of Newbridge. A fully integrated solution can therefore be
achieved at a fraction of the normal industry cost.
The products of these companies have been developed to integrate
seamlessly into a total Newbridge network solution. CrossKeys' service level
agreement software, for instance, fully complements the Newbridge Network
Manager and enables carriers and service providers to differentiate
themselves in the market.
An area with massive growth is that of IP telephony, allowing carriers to offer
low-cost telephone services. Another affiliate, Vienna Systems' gateways
and brand new client IP telephone sets have changed the telephone industry
dramatically. Other leading applications include satellite communications using
SpaceBridge switches linked into the central core, and Newbridge Wireless
ATM connecting up to Starvision's interactive distance learning systems.
LAN/WAN applications include TimeStep's SVPN's (secure virtual private
networks), Castleton's voice over frame relay and access devices, Telexis'
networked video for remote surveillance and West End's advanced cable
modems and hybrid fibre coax system. A particular customer can be
provided with a tailored solution to suit their exact networking needs, in
which each component is not only best of breed but has been designed to
work with all the other components.
Phase by Phase to Success
In the first phase, Newbridge provides all the services the new company
needs to run (finance, IT, HR, purchasing etc) with the exception of R&D.
This typically allows affiliates to get their products to market within a year. As
the company develops its own infrastructure, Newbridge's role becomes as a
channel to market and investor. By year three, only half of the revenue of the
company should be Newbridge-related, and by year five, the company
should be ready for its initial public offering. The graph below shows the
typical development of an affiliate from investment through to volume
shipment, and positions some current affiliates in the lifecycle.
Newbridge's affiliate programme has brought many benefits to Newbridge.
But perhaps the ultimate judgement on the success of the programme should
be the success of the affiliate companies themselves. The financial picture is
rosy. The affiliates now have a market capitalisation of more than US$ 823
million, and are growing their sales well in excess of 100 per cent year on
year. Perhaps most significant of all, the highest growth is through
non-Newbridge channels, an excellent indicator of industry acceptance of
these advanced technologies.
And the future? Newbridge has every intention of continuing along this highly
successful and innovative path. Their two latest affiliates announced in June
1998, PixStream and ImagicTV, are both focussed on the rapidly growing
area of video in telecoms applications. t
Dave Vant is director of affiliates marketing at Newbridge Networks.
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