Canadian based Nortel has agreed to acquire privately held optical networking company Qtera for up to $3.25 billion in stock.
The purchase is Nortel's second largest ever after Bay Networks, which it bought for $6.9 billion last year.
The company hopes the buy will give it an edge over rivals such as Ciena, which is developing similar technology, and Lucent Technologies and Cisco Systems, which are also aggressively pushing their own optical networking strategies.
John Roth, Nortel's president and chief executive, said: "The surge in Internet usage and ebusiness makes the delivery of the high performance, all optical Internet essential."
Under the terms of the deal, Qtera will become a unit of Nortel, but 140 of its staff will remain at its current headquarters in Florida and another 30 in Texas.
Fahri Diner, Qtera's joint founder and chief executive, who previously helped establish Siemens' optical networking division, will continue as the unit's president. Although he declined to say which other companies were in the bidding, Diner said that Nortel was the most desirable partner.
The stock transaction is expected to close in the first quarter of 2000.
Qtera's offering enables phone and data traffic to be sent over fibre optic networks at a distance of up to 2,500 miles, but at a lower cost than traditional phone lines.
The system operates at 10 gigabits per second or the same speed as Internet backbone networks and transfers data as light without needing to convert it to electronic signals. This increases the reliability of the network and means it drives down the cost of Internet traffic.
Traditional technologies require frequent conversion from light to electronic signals and back again, which adds to the expense.
Although the Qtera's multibillion dollar selling price is in line with recent acquisitions in the optical networking space, analysts speculated that the firm was also close to completing work on advanced optical switching technology.
This will further improve the efficiencies of long distance data networks by reducing the need for electronic switching and provisioning gear.
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