Nortel has successfully beaten off rivals to acquire Bay Networks in a $9.1 billion stock deal.
The Canadian telecomms equipment maker has been rumoured for months to be wooing Bay as part of its move into the data networking sector. Other carrier systems manufacturers, notably Lucent, have also been linked with Bay, but Nortel was "always the preferred candidate" according to an insider today.
Nortel will pay $38.21 per share (at current prices), in a deal that will give Bay shareholders 0.6 Nortel stocks for each Bay share - or a 21 per cent stake in Nortel. Both boards have approved the proposed deal, which now needs to be approved by regulatory bodies, something analysts believe will be a formality.
Although details of the merger are sparse so far, Bay will retain its brand name "for the foreseeable future" and its California headquarters. It will be merged with Nortel's enterprise data networks division, which will take the Bay name and will become a single focus for Nortel's nascent data networking business. The companies will not comment yet on whether the acquisition will lead to job cuts.
The unit will be headed up by Bay?s current chief executive, David House, who will report to Nortel?s chief executive, John Roth. House was brought in from Intel two years ago to try to turn Bay round following a string of disappointing quarters resulting from an increasingly competitive market and a difficult merger. Bay was formed from the combination of Wellfleet and Synoptics.
Although Wall Street has generally been favourable to House, crediting him with bringing some of Intel?s expertise in supply chain efficiency and rapid market adaptability to Bay, he has been unable to grow his company to challenge Cisco and its mighty router base in the corporate and ISP sectors.
The combined company will have a turnover of almost $2.8 billion, based on 1997 figures, adding Bay?s $2.09 billion to the $785 million made by Nortel?s data networking arm. This is still less than half the turnover of data market leader Cisco on $6.4 billion last year.
But even the largest data specialists are dwarfed by the telecomms equipment giants, with Cisco itself feeling the need to put up takeover defences last week as these companies become increasingly serious about expanding into data. Bay will now have a corporate parent with annual turnover of nearly $18 billion, which sees data as its largest growth area for the rest of the decade.
As well as growing its own data business, Nortel said it was keen to buy Bay for its IP expertise, which it needs in all areas of its operations. ?Dave House will bring IP networking expertise to all of Nortel?s line of business, and that will benefit customer of our carrier, broadband, wireless and enterprise operations,? Roth said.
He added that the merged entity will focus on next generation IP networks, bringing together technology from all over Nortel. It will particularly push multimedia networks that will carry voice, data and video across Lans, Wans and carrier backbones in a consistent manner. This could enable Bay to compete for large corporate accounts more effectively against Cisco than it has done recently. It also raises speculation over whether some of Bay?s commodity level networking devices will be phased out in favour of corporate IP solutions.
Driven by the convergence of voice and data and the growth of large scale Internet usage, most of the carrier equipment makers are moving into Lans. Almost as large as today?s deal was Tellabs? acquisition of Ciena for over $7 billion, while Lucent and Alcatel have both been on the takeover trail recently.
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