Nortel buys web switching specialist

Nortel Networks has agreed to buy Alteon WebSystems for between $7bn and $8bn in stock in a deal announced late last week.

The deal beats the $6.9bn Nortel paid for Bay Networks two years ago as the Canadian company's biggest acquisition.

The purchase gives Nortel more weapons against Cisco as the major equipment providers position themselves for the continuing growth of internet infrastructure. Nortel said it would deploy Alteon's intelligent content switches and routers in its internet data centres to improve content delivery.

The actual price of the takeover will depend on the movement of Nortel's share price. The company has agreed to proffer 1.83 shares for each Alteon share. That originally valued the offer at $7.8bn. But because investors were unimpressed by the deal on Friday, the value at the close of the New York Stock Exchange dropped to $7.17bn.

Alteon chief executive Dominic Orr bowed to the inevitable by accepting the Nortel offer. "There's no way Alteon alone can achieve the kind of penetration [it needs] without major delivery and service engines like Nortel has," he said.

Nortel decided to buy Alteon instead of forming a partnership or reselling the switches because it saw a need to bring new products to market fast or lose a sales opportunity, said chief operating officer Clarence Chandran.

Nortel said the Alteon acquisition would enable it to offer users "next-generation" internet data centre products capable of delivering content efficiently and reliably at high speeds.

"The acquisition gives Nortel an entry in the ISP/ASP market which traditionally has not been one of their strengths," said Greg Collins, an analyst with Dell'Oro Group.

Peter Crowcombe, of Infonetics Research, said the deal will extend Nortel's portfolio into a hot area of networking - server load balancing. Arch-rival Cisco has previously bought ArrowPoint to boost its offering in the area.

Server load balancing technology is needed to manage the resources of content-heavy websites and used by large corporations as a point solutions as well as ASPs and ISPs.

"The moves Nortel and Cisco have made into this space will make it easier to manage server load balancing technology," said Crowcombe.

"The rate of innovation will probably reduce, but users will get integration into a coherent management system and it will be easier to get support."