SJ Mercury. Merger Hunter Becomes the Hunted
mercurycenter.com
Published Sunday, February 28, 1999, in the San Jose Mercury News
BY SCOTT HERHOLD
Mercury News Staff Writer
AS the chief acquisitions strategist at Ascend Communications
Inc., Ken Fehrnstrom spent a week of 20-hour days in January
poring over the details of Ascend's acquisition by Lucent
Technologies Inc. The day after the deal was announced, he felt
like he had fallen off the face of the Earth.
''Man, it was different,'' remembers Fehrnstrom, Ascend's senior
vice president of business development. ''You had all this
adrenaline going, it was really exciting, and then, suddenly, it
stopped. Lucent was in control. I thought, 'What am I gonna do
now?' But it only lasted a day, and then I started getting phone
calls from the Lucent people.''
For his age -- 38 -- Fehrnstrom can boast of as much experience
in large-scale acquisitions and mergers as virtually anyone in
Silicon Valley. As a top official at Cisco Systems Inc. for 6 1/2
years, he was involved in a half-dozen mergers or strategic
investments.
Now, rather than being the predator, he's the willing prey.
He's the leader of the integration team for the biggest
telecommunications equipment deal in history -- Lucent's $21
billion acquisition of the Alameda-based Ascend, a maker of
high-speed switches and other networking gear.
Ascend's 3,200 employees -- and Lucent's 130,000 -- stand at
the midpoint of a huge increase in American mergers. According
to Broadview International, a merger and acquisition investment
bank, the number of acquisitions of North American companies
increased from 133 in 1997 to 185 in 1998 -- a 40 percent
increase. In Silicon Valley, the total dollar value of mergers has
risen sharply since 1994.
The story of the Lucent-Ascend deal -- a parable in the
eat-or-be-eaten world of Silicon Valley -- can probably best be
seen through the eyes of one man who has had to work out many
of the details: Fehrnstrom (pronounced FERN-strum) a smiling,
6-foot-6 executive who looks a little like the actor Bruce
Boxleitner.
Though he was trained as an engineer, he's made his place in
Silicon Valley as a bold deal-maker, salesman and furious
competitor. ''He keeps a lot of plates spinning in the air at the
same time,'' says Beth Kilmer, an Ascend executive who works
with him.
The oldest of four boys born to an optometrist and nurse who
established a home on Cape Cod, Fehrnstrom competed in
hockey, soccer and track in high school. And when a dance or
homecoming party was being planned, he was nearly always at
the center of the activity.
''Growing up with four kids, you're constantly competing,'' says
his brother, Eric, a Boston public relations executive. ''You're
competing on the athletic fields, and you're competing at the
dinner table. You learn to eat fast, because the one who finishes
first gets seconds.''
After obtaining a degree in chemical engineering from McGill
University in Montreal, Fehrnstrom went to work in the early
1980s at GTE before joining a Massachusetts start-up called
Tellco Systems, which was selling products to the
telecommunications world after the breakup of AT&T.
It wasn't a long-term stint. Fehrnstrom had promised himself that
he would sail the Caribbean before he was 30. With the money
from Tellco's stock and a profit from fixing up a couple of condos
in Boston's Back Bay, he took off with his girlfriend on a sailboat
well before his deadline. They were gone for 2 1/2 years.
When he returned, Fehrnstrom headed west to Silicon Valley,
and after a couple of stints at early networking companies, he
joined Cisco in 1991 as a marketing manager.
Marketing and spin
Unlike many engineers, Fehrnstrom has flourished in the world of
marketing and spin. And he cheerfully says that part of what he
did at Cisco was to help devise spin -- sometimes true,
sometimes not -- about the opposition.
Noting that the merger of Synoptics and Wellfleet in 1994 to form
Bay Networks Inc. was ''pretty darned scary for Cisco,''
Fehrnstrom said, ''What we decided to do was paint a picture
that large acquisitions don't work, that mergers of equals don't
work, that acquisitions cross-country don't work.''
But while it was casting doubt on the efforts of its adversaries,
Cisco was busy making its own buys. Worried that customers
would turn to less expensive network switches to replace Cisco's
routers, the company planned an aggressive acquisition strategy
-- first Crescendo, then Kalpana, then Grand Junction and others.
Since 1993, in fact, Cisco has acquired 30 companies.
It was invaluable experience for Fehrnstrom, who worked closely
on six or seven transactions. ''I have incredible respect for
Cisco,'' he says, and a lot of respect for (Chairman) John
Morgridge and (CEO) John Chambers. Often, when I'm making
a decision, I ask myself, 'What would the Johns do?' ''
Fehrnstrom is too discreet to say what Cisco acquisitions did not
work out as planned, though some analysts have been critical of
the price the company paid for Granite Systems Inc. ($220
million in stock), a company that was begun by Silicon Valley
legend Andreas Bechtolsheim.
When deals don't work
But he does offer general reasons for why some deals -- at Cisco
or elsewhere -- don't work. ''It comes down to different things,''
he says. ''A business unit leader who wanted to do a deal and
got emotional about it, and we did the deal for probably not the
best reasons. Or we didn't adequately handle the people issue.''
In January 1997, Fehrnstrom committed apostasy, yielding to the
entreaties of Ascend's CEO, Mory Ejabat, who was formulating
the strategy of selling telecommunications equipment to Internet
service providers and local carriers rather than to corporate
customers. Intrigued by the idea, Fehrnstrom joined Ascend as
the head of its sales organization.
Within a year, that evolved into his current role as a senior vice
president for business development, putting him at the center of
Ascend's ambitious plans for acquisition.
At a recent ''Integration Planning Breakfast'' for Ascend
employees, a relaxed Fehrnstrom, wearing blue jeans, a blue
work shirt and deck shoes, told the group that Ascend intended
to swallow fish nearly as big as itself. ''The idea was to make it
much larger, to make it the No. 2 or No. 3 player in the telecom
equipment industry,'' Fehrnstrom told the group. ''We might have
at that point acquired Nortel or Alcatel.''
Ascend did complete one significant deal last year: The $825
million stock acquisition of Stratus, which had a technology that
Ascend coveted. Called SCP, the Stratus technology acts as the
brains of a telecommunications network, directing data and voice
calls to separate tracks.
Fehrnstrom followed that deal with several others, selling off
Stratus' non-telecommunications unit. In fact, the last piece of
Stratus -- known as S2 Systems -- was sold last week to a
private equity management firm.
But Ascend's plans began to take a very different direction
toward the end of last September, when its executives met with
Lucent officials for what Fehrnstrom calls a preliminary meeting
on the East Coast. ''They actually called us,'' says Fehrnstrom.
''They said, we think there might be some reasons for doing
business together.''
For four hours, Ascend presented its business plan to Lucent
executives, including Bill O'Shea, the president of Lucent's data
networking division, and CEO Rich McGinn. At the end of the
meeting, Fehrnstrom says, the Lucent executives told the Ascend
people that their vision was remarkably close to Lucent's own.
But it wasn't until a month later -- when Lucent outlined its vision
to Ascend in a New York meeting -- that the two sides thought
there might be a basis for a deal.
In December, Lucent CEO McGinn and Ascend CEO Ejabat
met face-to-face in San Jose and agreed to come to terms. But
the crucial number -- an exchange of 0.825 shares of Lucent
stock for every share of Ascend -- wasn't reached until the two
met again in Chicago on Jan. 4.
'It was like a war room'
For the next six days, the two sides holed up in a Berkeley hotel,
exchanging information about their financial situation. ''It was like
a war room,'' remembers Fehrnstrom, who led the Ascend team.
Finally, on Jan. 12, the Ascend board approved the deal. So,
too, did Lucent's board. As word began to leak out, the two
sides formally unveiled the pact the next day.
The deal leaves plenty of unanswered questions. For starters, the
Department of Justice must approve the deal, which is expected
to happen. Also, the two sides must deal with merging very
different cultures -- the entrepreneurial Ascend with the
established Lucent, West Coast vs. East Coast, stock options vs.
sales commissions.
In fact, any number of academic studies show that mergers,
particularly of different kinds of companies, often fail. Mark
Sirower, a New York University professor, studied 168 mergers
that took place between 1979 and 1990 and found that their
average returns declined 40 percent four years after the deal.
Why do the deal if Ascend's purpose back in January 1998 was
to go it alone? ''I always said if someone came to us with a big
enough check, we'd listen,'' Fehrnstrom explained. ''The Lucent
deal, executed flawlessly, offered high rewards. And the risks
weren't nearly as high.''
Ascend employees have generally greeted the deal with applause:
After all, it offered a significant premium for their stock options.
They will continue to have new options in Lucent, a point Ascend
insisted upon.
Nonetheless, the breakfast meeting revealed an undercurrent of
skepticism about whether Lucent, with its 130,000 employees,
can retain Ascend's entrepreneurial culture. ''Who's going to
watch over us?'' one employee asked Fehrnstrom. His answer:
''Us.''
Fehrnstrom says he's fully committed to staying over the next four
months, while the deal is finalized. And he says he's ''very
impressed'' with the Lucent team and expects to be offered a
longer-term job. But he's not making commitments beyond 12
months. After all, that's several light-years away by his clock.
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