Siemens, Alcatel Find an Internet Fast Lane on I-495
Outside Boston
By Kevin Petrie
Staff Reporter
3/5/99 3:05 PM ET
The European telecom giants are on a quest to beat the Yanks.
And they are searching for their holy grail on a brief stretch of Interstate 495 outside
of Boston, where a gaggle of entrepreneurs is trying to reinvent the networks that
connect computers and telephones.
After years of sitting on their hands, German electronics concern Siemens and
France's Alcatel (ALA:NYSE ADR) are snapping up small U.S. companies in an
effort to leapfrog North American powerhouses Cisco (CSCO:Nasdaq), Lucent
(LU:NYSE) and Northern Telecom (NT:NYSE).
The Europeans' latest potential target is Redstone, Westford, Mass., which is
rumored to have received competing bids from suitors Lucent, Siemens and Alcatel.
Redstone makes routers, which help carriers and Internet service providers expand
their networks while adding advanced services such as videoconferencing and
telephone calls over the Internet. The bids are said to be in the $400 million range.
Lucent declined to comment, and neither Alcatel nor Redstone returned calls seeking
comment.
On Tuesday Alcatel said it will pay $2 billion in cash for Calabasas, Calif.-based
Xylan (XYLN:Nasdaq), primarily a builder of computer switches for corporations.
Then, just yesterday, Alcatel disclosed plans to buy Assured Access, a Californian
supplier of Internet dialup gear, for $350 million.
But the real excitement is in Massachusetts, where Siemens plans to acquire
Westford, Mass.-based Castle Networks for $300 million in cash, according to a
person familiar with the matter. The deal also calls for a $15 million
performance-related bonus. Siemens also will buy Argon Networks, in Littleton,
Mass., for $200 million in cash and $38 million in incentive pay, which typically goes
to recent and future hires at the acquired companies. Officials at Siemens, Castle
and Argon declined to comment.
Collectively, the 12 or so Massachusetts start-ups have the potential to forge
tomorrow's Internet, according to analyst Paul Johnson with BancBoston Robertson
Stephens. On Thursday Johnson launched a Web site for Robbie Stephens,
"nextgenerationnetworks.com," where he argues that the Internet as we know it is
dead.
"The new networks will look like the Internet, but will offer much greater scalability
while at the same time offering the robustness and ubiquity of the current
circuit-switched [telephone] network," writes Johnson, echoing a column he published
in Forbes ASAP last month.
Castle, Argon and Redstone are clustered in office parks northeast of Boston. They
and several neighboring firms are run by veterans of networking companies who left
WellFleet and Cascade, which were eventually consolidated into Nortel and Ascend.
Castle Networks has shipped test versions of a switch that allows phone companies
to combine their old voice switches with the Internet, rather than replacing them.
Argon has a switch router that carries data messages through both Internet protocol
and asynchronous transfer mode, but still works snugly with old telephone
architecture.
And the Massachusetts gang will play a big role. Here is where the Europeans have
found the technology that might spring them ahead of Lucent and Nortel.
"Strategically, it's brilliant," says Johnson. But "I think execution is very difficult."
Indeed, Siemens and Alcatel come late to the acquisitions game. And they must
exploit U.S. entrepreneurial talent without stifling it. Vice President Hilary Mine with
Probe Research points out that telephone-switch maker Stromberg-Carlson,
located in Boca Raton, Florida, has benefited little from being folded into Siemens in
1990. Mine says the Yanks must stay independent and avoid the bureaucracy across
the Atlantic.
No wonder Alcatel will base its Xylan division in the U.S. and keep its management
intact. Alcatel will simply sell its products through its global distribution channel.
European acquirers, historically a cautious lot, must give their new employees loose
rein. Analyst Adnaan Ahmad with Merrill Lynch advises the Europeans to "create a
new company," with an independent chief, and base it in the U.S.
Analyst Pim Bilderbeek with International Data says cultural differences will play
into the mergers: U.S. workers, especially in technology, take more risk. They'll sign
up more willingly with start-ups, according to Bilderbeek. And they find that failure
isn't such a liability: "It's actually a good thing on your resume," Bilderbeek says.
Making a merger work is also a challenge for Lucent and Nortel, which have made big
purchases of their own. Lucent plans to combine its telephone operations with the
Internet company Ascend in an $18 billion acquisition later this spring. Similarly,
Nortel is working to integrate Bay Networks, which it bought in September.
The addition of the European players will intensify competition with Cisco, king of
today's Internet, as it tries to attack the phone business. Principal Craig Johnson of
the consulting firm Pita Group says Cisco might even lose business from Alcatel, its
biggest reseller in Europe, as the two compete more fiercely in the U.S. For the
record, Cisco says it's still tight with Alcatel.
But now Cisco must show it can stay ahead of the pack.
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