One-stop shopping is the buzzword of the moment in the networking industry, as companies scrabble for takeover opportunities in a rapidly consolidating market.
Networking companies have spent billions to gain the prize of providing a complete range of networking products, crossing traditional boundaries between LAN and WAN, switching and routing solutions.
Last week Ascend and Cascade became the latest networking companies to join the consolidation frenzy. The two are set to merge as soon as the deal receives clearance from the US authorities. This is expected to happen in the summer.
The deal follows 3Com's $6.6 billion acquisition of US Robotics last month, Cisco's merger with StrataCom last year, and a host of smaller acquisitions over the past 18 months. Both partners in this latest takeover are no strangers to the merger game. Cascade bought Sahara Networks earlier this year for $212.9 million (#133 million), around the same time as Ascend bought StonyBrook Services for $30.3 million.
Ascend is set to pay around $3.7 billion for Cascade, making it one of the largest deals in the networking industry. The sum is over 10 times Cascade's revenues last year and is in the same billion dollar league as 3Com's pending acquisition of US Robotics, and Cisco's $4 billion purchase of StrataCom last year.
Under the terms of the deal, each share of Cascade stock will be exchanged for 0.7 of a share of Ascend stock. Ascend shareholders will own around 65% of the combined company's shares, and Cascade shareholders about 35%.
The merged company will keep the Ascend name, be headed by Ascend president and CEO Mory Ejabat, and continue to be headquartered in Alameda, California.
Ascend's takeover offer came as Cascade was poised to post its first quarter results. Last week the company released estimated figures in anticipation of the official posting on April 10, the date when Ascend will also reveal its first quarter results. However, Cascade's results are likely to come in below analyst expectations with revenues estimated at $90 million for the quarter, ended 29 March.
The deal is expected to help Ascend attack networking giant Cisco, currently the largest single networking vendor. Ascend is a leading player in the remote access server market which Cisco dominates and has branched out into routers, another Cisco market. Cascade specialises in the switching sector, specifically in the categories of Frame Relay, ATM and IP switches, where Cisco is again a major player.
Ian Keene, an analyst at researcher Dataquest, said: "Cisco should take note and follow how well the merger goes with great interest. Ascend and Cascade's merger will step up their competition with Cisco significantly."
He added there remain some unresolved questions about how the companies will manage their integration, and deal with the overlap between their product lines.
Cisco is watching with interest. Paul Mountford, Cisco's UK managing director, said the deal "looks like a good technology fit". But, he added, the real issue is whether the companies succeed in integrating their businesses and product lines.
"They will have a massive head-ache putting the two companies together," Mountford predicted. "They are both embryonic companies with very high growth rates, still with their founder CEOs. I can see two big egos clashing, just the same as with 3Com and US Robotics. In these cases, it's not the technology that counts, but the people you keep, the brains behind the technology. Success depends on that."
According to market figures from US research firm Vertical Systems, compiled in August last year, Cascade is leader in the business of selling switches to both telecoms carriers and ISPs, with 29.7% and 56% market shares respectively.
Ascend can also claim leadership in its specialism, with a 55% market share in the remote access concentrator sector according to research by the Dell 'Oro Group in October last year (see box left) and rivals leading supplier Cisco in the SoHo router segment.
One of the claims on which Cisco's marketing message rests is that it offers a one-stop shop, especially to service providers. The company boasts that over 70% of Internet traffic runs over Cisco routers in the Internet backbone. With its purchase of US Robotics, 3Com gained the ability to offer customers solutions spanning the LAN and the WAN, from remote access products and high-speed modems to desktop cards.
But Ascend and Cascade together would aim to rival that one-stop message, as the combined company would be able to offer switches, server products and routers.
"It's an ideal acquisition, and we're very pleased and excited," enthused Alan Bates, European marketing manager at Ascend. "It gives us a strong competitive position to maximise our market opportunities." He added that the merger brings "a great deal of management depth" to the company, with the recruitment of Dan Smith and Gururaj Deshpande from Cascade, both "greatly respected in the industry".
"It's a clear case of where one plus one equals more than two," Bates concluded.
"Ascend and Cascade share a common vision of an emerging network infrastructure that delivers end-to-end networking solutions to a broad base of customers," explained Mory Ejabat, Ascend's president and CEO. "To deliver these solutions requires best-of-breed technology. The combination of the products, technologies and sales channels of both companies, with the leadership each company has in the different market segments, will position the new Ascend as one of the networking industry's premier providers of end-to-end networking solutions for carriers, ISPs, network service providers and small and large businesses."
Dan Smith, president and CEO of Cascade, added his vision of the new company's future. "The integration of the combined company's products will expand upon the carrier class solutions offered from the edge of the network through to the core, providing true end-to-end quality of service.
"By providing an integrated set of products, we will, for the first time, allow network service providers to quickly and cost effectively deploy, provision and deliver network services which will support the evolving needs of their customer base. Delivery of this new networking paradigm through Ascend's strong international presence will be an added advantage to the already compelling story behind the combination of the two companies."
The deal is likely to have most impact in the service provider and telcom markets, where both Ascend and Cascade have their strongest customer bases, rather than in the corporate networking arena. As Cisco's Mountford pointed out: "We don't see the Ascend and Cascade deal as a major threat in the enterprise."
But whether the deal will have a positive effect on customers of the two companies depends on whether the pair can sort out their integration issues and offer a true one-stop shop.
If they can, it will give users the opportunity to source more of their high end networking products from a single supplier. If they cannot, the acquisition will go down as another failed merger attempt.
Cascade: company profile
Corporate Headquarters: Westford, Massachussetts
Revenues: 1995 $135 million
President and CEO: Dan Smith
Areas of expertise: carrier class ATM and frame relay switching products
Major customers: ISPs and public telecoms carriers
Ascend: company profile
Corporate headquarters: Alameda, California
Revenues: 1995 revenues $150 million
President and CEO: Mory Ejabat
Areas of expertise: high-speed switched access products, such as WAN access concentrator prots
Major customers: ISPs (Ascend claims 28 of the world's 30 largest ISPs as its customers).
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