looks like we should start buying FORE:
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Networking equipment shakeout seen
By Jeffry Bartash, CBS MarketWatch
Last Update: 6:09 PM ET Jan 11, 1999
WASHINGTON (CBS.MW) -- The swift-moving telecommunications networking sector may be on the verge another seismic shift in the competitive landscape, and that could spell trouble for the smaller players.
On Monday, the long-rumored Lucent Technologies takeover of Ascend Communications festered anew amid reports that a deal could be struck as early as Wednesday. See related story. If the acquisition is consummated, the new entity will pose the greatest challenge yet to the supremacy of Cisco Systems in the production of Internet-based networking equipment.
The explosive growth of the Internet -- essentially a worldwide network to which anyone with a computer can gain access -- has created huge demand for equipment that eases the transfer of digitized data over public phone lines or in-house networks.
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Because data -- video, graphics, sound -- hogs so much bandwidth, new technologies and new networks have been created to handle the increased traffic. Older, circuit-based, analog technology has proven unsuitable for the task.
Birth of a giant
In just the past two years, Cisco (CSCO) has emerged as the leader in Internet-based data networking equipment. Since 1996, sales have ballooned to more than $8 billion annually from $4 billion. Of the 30 or so analysts who cover it, every single one either has a "strong buy" or "buy" rating on the stock.
Cisco's biggest competition is coming from established phone equipment makers, such as Nortel Networks (NT) and Lucent. Indeed, Nortel acquired data networker Bay Networks last year in an attempt to encroach on Cisco's turf.
Similarly, Lucent's (LU) potential acquisition of Ascend (ASND), the fourth largest maker of data networking equipment, would fortify its roster of data products in areas where it is lacking. Ascend produces market-leading ATM, or asynchronous transfer mode, switches, which are used to route data traffic.
"Ascend allots to Lucent a large and missing piece of equipment Lucent is lacking," said Christin Armacost of Everen Securities. "They really need Ascend to compete head to head with Cisco."
Match made in ...
While some analysts suggest that the two companies -- one an older, East Coast firm, the other a young, West Coast one -- could face significant corporate culture clashes, most industry observers believe the two companies are a great fit.
Lucent has tried -- and mostly failed -- to develop strong ATM-based products, but the companies' products otherwise don't overlap much. Yet the Ma Bell offspring would gain plenty of technical expertise and could provide the marketing power to push Ascend's ATM products to carriers with which it has strong relationships, such as AT&T and the Baby Bells.
"Why reinvent the wheel? The issue is putting the muscle behind it to take it to the next level," said Maribel Lopez, a networking analyst at Forrester Research in Cambridge, Mass.
Tight relationships with the traditional phone companies is especially important to equipment makers because the carriers are likely to purchase tens of billions of dollars in data networking products over the next decade as they transform their circuit-based analog systems to packet-switch digital ones.
And that's one area where Lucent, spun off by AT&T (T) two years ago, has an edge. It hopes to use those relationships to win contracts to supply the carriers the equipment for the older circuit-based systems and for the newer IP-based ones. Ascend's ATM products, in fact, are in high demand among carriers.
Cisco, often portrayed as a steamroller in the networking sector, still hasn't made huge breakthroughs in that area, though it's making inroads with contracts with GTE Corp. (GTE) and U S West (USW). About 35 percent of its business is with the major carriers, Armacost reckons.
The next wave
A Lucent-Ascend deal is likely to ignite another burst of consolidation in the networking sector, which has been relatively quiet over the second half of 1998. Their combination would clearly position Lucent and Cisco as two companies to beat.
"Certainly Ericsson (ERICY), Alcatel (ALA) and Nortel could become more aggressive in acquiring data networking technology," Armacost said. Smaller "companies like Fore Systems (FORE) and Cabletron (CS) will be forced to take a hard long look at how they compete."
Indeed, many second-tier companies aren't likely to stay independent for long, argues Andrew Pierog, a networking researcher at Frost & Sullivan. "All of the smaller companies are going to be bought out," he said.
Predicting who snaps up whom, however, is anyone's guess. |
