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Bay and Cabletron buy switching start-ups

by James Harding in Silicon Valley

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Bay Networks and Cabletron Systems have both bought start-up companies to give them new technology in the fast moving switching market.

Bay bought New Oak Communications for $156 million to acquire its access switch products, while Cabletron took over Yago Systems, a Layer 3 Gigabit company, for around $210 million, depending on future stock prices.

New Oak?s virtual private network expertise will allow Bay to help customers set up Internet-based business, according to Bay chief executive Dave House. "This gives us a time-to-market advantage over our competitors in this marketplace," he said.

The start-up's products offer more security when connecting businesses' internal networks to external customers, the companies said, because its switches do not need modems.

Bay will pay $133 million in stock and $23 million in cash for New Oak, leading to a charge in its quarter ending 28 March. Its founder and chief executive, Jeff McCarthy, is a former Bay employee and he will become vice president of Bay?s Extranet access division. His 43 staff will join Bay?s Internet/telecomms business group.

Analysts said the deal gives Bay the product it needs without nine months of development work and pushes New Oak?s product into a better, bigger sales channel. The deal follows Bay?s takeover of Rapid City last June and Netspeak two weeks ago.

Cabletron already owned 25 per cent of Yago and the deal was expected by insiders, although Cisco Systems was rumoured to be considering an offer for the start-up. Yago makes switching routers for Gigabit Ethernet and Fast Ethernet networks, with its MSR technology to help routers handle larger volumes of data.

Cabletron chief executive Don Reed has high hopes for the sales of Yago?s products. He did not foresee redundancies at Yago or predict Yago?s sales volumes. The complicated terms of the deal mean Cabletron will pay for Yago with 6.1 million shares, worth $156 million now and which should be worth $213 million within 18 months. If they are not, Cabletron will issue more shares to make the deal worth $213 million at current prices.

Analysts said the buy will reassure Cabletron customers about its commitment to Layer 3 switching.

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