Lucent on the prowl?
By Tim Greene, Jim Duffy and Chris Nerney
Network World, 09/21/98
Murray Hill, N.J. - Like a muzzled shark in a tank full of fish, Lucent has been
biding its time. But the wait is just about over.
Come Oct. 1, the company will be released from its accounting shackles and free
to wield its considerable corporate assets to gobble up companies that will fill
holes in Lucent's data network product line (see page 63). Lucent has an overall
value of nearly $100 billion, with some $1 billion cash in pocket.
The flat-out favorite to top Lucent's shopping list: Ascend Communications.
Other possibilities include 3Com, Cabletron, Nokia and Newbridge Networks.
Experts say Lucent could use some help filling out its ATM wares and network
management capabil-ities.
It could also use products that would provide quick entry into the hot carrier and
ISP data network markets. Time is of the essence because competitors, notably
Cisco, have well-established accounts with those types of customers. And service
providers are licking their chops over a $2 billion demand for virtual private
network (VPN) services that Lucent cannot provision yet, according to Tom
Nolle, president of CIMI Corp, a technology assessment firm in Voorhees, N.J.
All Lucent CEO Rich McGinn will say about acquisitions is that the company is
interested in boosting its presence in data networks, wireless technology and
optical networks. Lucent will get what it needs any way it can, through research
and development, alliances and acquisitions, he says.
While Lucent and Ascend are silent on a potential pairing, Ascend could help
Lucent gain access to desired regional Bell operating companies and ISPs - two
of the largest buyers of data gear.
The RBOCs and the ISPs already buy Ascend gear and both plan to buy in bulk
in the coming years, particularly the RBOCs as they break free of federal
restrictions. Lucent could use that foot in the door.
"They need to buy Ascend really badly. Ascend has penetration into the ISPs,
and the two companies have little or no product overlap," says Ray Keneipp,
principal analyst at Current Analysis in Sterling, Va.
For Lucent, Ascend would bring its GX 550 core ATM switches and Navis
management software, which supports IP quality of service over frame relay and
ATM backbones.
While many RBOCs already have Lucent gear, it is voice, not data, equipment. It
will be much easier for Lucent to sell data gear to an RBOC if it owns a
company such as Ascend, whose switches already anchor RBOC data networks,
Nolle says.
With a jump-start in carrier and ISP data networks, Lucent could take on
anyone. "It would be great if they bought Ascend because Lucent would be a
kick-ass competitor to Cisco," says Craig Johnson, principal of the PITA Group
in Portland, Ore.
Cisco had no comment on Lucent's potential to make a big acquisition, though a
Cisco spokesperson did say that acquisitions are hard to pull off in terms of
product and personnel synergy and integration. Cisco should know; the company
has spent about $7 billion to acquire 27 companies over the past five years.
Lucent-Ascend would also pose a threat to Nortel, which just bought Bay
Networks in an attempt to better compete against Cisco.
Newbridge, with an impressive array of ATM gear, would be a more difficult
buy because it is closely linked with Siemens, Nolle says. Newbridge and
Siemens jointly sell ATM switches under the name MainStreet.
Others rumored to be on the Lucent shopping list include 3Com and Cabletron,
but experts say they are less likely matches. The LAN network gear 3Com and
Cabletron sell is yielding smaller and smaller profit margins, Nolle says, and that
is not Lucent's game.
"Lucent is going after high-performance campus switching, multiservice
concentrators for WAN access and dense wave division multiplexing (DWDM),"
says John Morency, an analyst with The Registry in Boston.
In fact, Lucent is expected to make a run at the DWDM market in the near
future with its own technology that will expand the capacity of fiber optic lines
to multiterabits per second. In addition, its less expensive fiber technology will
push broadband fiber to the curb, Lucent told analysts last week.
With $28 billion in sales, Lucent makes no secret about its desire to become a
kingpin in data networking. Since it split off from AT&T two years ago, Lucent
has been prohibited from making acquisitions based on a procedure called
"pooling of assets," an accounting method that eases the financial impact of
stock-swap purchases. The restriction disappears Oct. 1.
In the meantime, Lucent hasn't exactly been a wallflower. It has aggressively
snapped up 13 smaller companies for cash. The result has been an impressive
collection of technology.
Those purchases include: Octel Communications, for messaging ($1.8 billion);
Livingston Enterprises, for remote access networking solutions ($650 million);
Prominet Corp., for Gigabit Ethernet switching and IP-based services for LANs
($200 million); Yurie Systems, for ATM access ($1 billion); and LANNET, for
Ethernet and ATM LAN switches ($150 million).
Earlier this year, Lucent found another way to invest in other companies without
pooling by setting up its own venture capital arm, Lucent Venture Partners.
Backed by $100 million, Lucent Venture Partners is focusing on technologies
such as wireless, data networking, semiconductors, communications software and
professional services.
In April, Lucent formed a partnership with Accel Partners, one of the elite
venture firms in Silicon Valley. Lucent joined Microsoft, Compaq and Nortel in
financing Accel's $35 million Internet Technology Fund II.
Lucent executives, including venture fund director John Hanley, met with Accel
as early as January to discuss investment strategies, Accel Managing General
Partner Jim Breyer says.
According to Breyer, Lucent is talking with a number of Accel's portfolio
companies about possible investment or OEM relationships. |
