SJ Mercury--Ascend can be bought
Posted at 8:05 p.m. PDT Sunday, September 27, 1998
Ascend ready if suitor pops the question
Sept. 28, 1998
BY ADAM LASHINSKY
Mercury News Staff Writer
SOME EXECUTIVES reveal a lot about their own goals and the future of their companies through their body language or the volume of their voice. Mory Ejabat, president and CEO of Ascend Communications Inc. (Nasdaq, ASND) isn't one of them.
Ejabat doesn't gesticulate or wink when he speaks, which he does essentially in one pitch and at one -- low -- volume. As such, it's difficult to discern the answer to what's becoming the technology investing world's $10 billion question: Is Ascend takeover bait for Lucent Technologies Inc. (NYSE, LU)?
But listen carefully and one comes away with two messages. Ejabat and his board definitely will sell Ascend for the right price, but it won't be the CEO's first choice. In other words, some companies are perennially up for sale -- Digital Equipment Corp. and Bay Networks Inc. are two recent examples -- but Ascend is not.
Ejabat is perfectly willing to go it alone by growing Ascend through additional acquisitions and internal product development. But he also thinks the networking-equipment industry is consolidating down to a very few players -- three or four, to be precise -- and if Ascend isn't one of them, so be it.
''At some point I have to go back and see what will make my shareholders happy,'' says Ejabat, in an interview at Ascend's Alameda headquarters, not far from the gritty industrial area surrounding the Oakland International Airport. ''At some point you don't have any choice (but to sell) because the offer is so good.''
What's gotten Ascend into this enviable position is its dominance of markets that let phone carriers build wide area networks for their customers. Because of a sometimes rocky 1997 merger with Cascade Communications Corp., Ascend makes leading equipment for sending data over networks in packets, as opposed to the traditional circuit-based systems dominated by Lucent, Northern Telecom Ltd. and a handful of other companies.
Because the new devices can carry voice or data over existing networks, they represent a giant growth opportunity for big players like Lucent.
''It is clear that the Cascade piece (of Ascend) has emerged as the most important player in packet-based networks,'' says Paul Johnson, datacom analyst and Ascend fan with BancBoston Robertson Stephens in New York. ''They have lost to nobody on major-network (contracts).''
It wasn't always thus.
Almost a year ago Ascend began having trouble digesting Cascade, causing it to miss its financial estimates. That resulted, inevitably, in a loss of confidence on Wall Street. The company's stock plunged from nearly $80 early last year to almost $20 before the year was out.
''Due to the Cascade acquisition, we didn't pay much attention to the management (of the company) and some of the deals (with customers) were pushed out,'' allows Ejabat. ''Sometimes you learn from your experiences.''
Now, the company is clicking again. It reports third-quarter earnings on Oct. 10, and Wall Street expects it to report profits of 31 cents a share, up 52 percent from the year-earlier period. And it has thrown cold water on merger talk in part by continuing to pursue acquisitions of its own, like the pending purchase of Stratus Computer Corp. (NYSE, SRA), a deal worth $861 million at Ascend's stock price of $47.81
Ejabat says the chatter about Lucent is a distraction only to the extent customers want assurance Ascend will be around to back up its products. And he offers one nugget on Lucent industry gossips can dissect when he says, off the cuff, ''I have no idea if Lucent is even interested in us.''
He declines to clarify if this means there have been no merger talks. But Ejabat did quash a different rumor in a conference call with analysts when he professed not even to know the name of Advanced Fibre Communications Inc. (Nasdaq, AFCI) CEO Donald Green, implying Ascend couldn't possibly be buying Advanced Fibre if he didn't know the CEO.
''I know what his name is now,'' Ejabat quips about Green.
For all the talk about independence, though, Ejabat clearly has considered a merger. Ruling no one out, he says only that a deal must not dilute earnings and have clear synergies. He doesn't dispute that Tellabs Inc. (Nasdaq, TLAB), the failed suitor for Ciena Corp. (Nasdaq, CIEN), would have synergies for Ascend. And he's checked Tellabs' stock price recently enough to know Tellabs, at $8.4 billion, is worth less than Ascend, which is worth about $9.6 billion.
What's more, Ejabat believes the datacom industry is consolidating so much that in several years only two scenarios are likely. The first sees only Lucent, Nortel and Cisco Systems Inc. (Nasdaq, CSCO) as survivors. The second includes these three and one additional stand-alone company, ''most likely Ascend.''
On one thing Ejabat is crystal clear: He'll only be employed at a big company in the industry if the second scenario comes true.
Says he: ''I like to work for a board.''
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