Latest networking merger is a sign of things to come

Summary:Northern Telecom Ltd.'s $9.1 billion acquisition of Bay Networks Inc.

Northern Telecom Ltd.'s $9.1 billion acquisition of Bay Networks Inc. may be one of the largest deals ever seen in the networking space, but it won't be the last.

As stock prices plunge, and voice and data networks become more and more interchangeable, the merger mania that has beset other industries has now hit the networking arena with a vengeance.

Besides the long-rumored Nortel/Bay deal, the past few weeks have seen Tellabs Operations Inc. snap up Ciena Corp. for $7 billion, and Alcatel Alsthom make a $4 billion bid for DSC Communications Corp. And over the past few months, Lucent Technologies Inc. has picked up Livingston Enterprises Inc., Prominet Corp. and ATM manufacturer Yurie Systems Inc.

Ever since Bay, of Santa Clara, Calif., missed its profit expectations last quarter, it has been seen as the next likely target. Rumors had it being courted by companies such as Ericsson Inc. and Lucent.

And they're likely still looking.

"The telco equipment makers [such as Lucent and Nortel] are buying the likes of Bay and the rest because it gives them instant channels," said Craig Johnson, an analyst at Current Analysis, of Sterling, Va. "Historically, Nortel and Lucent haven't sold through the data channels. And that's a leverage they'll be able to deal with now."

And now is certainly the right time to buy. Once a high-flying sector, data networking companies have lately seen some precipitous drops in their share prices.

The slide began last fall, and while some, like Ascend Communications Inc., have recovered and even risen slightly, others have stayed down, making them more attractive to potential buyers.

3Com Corp., Cabletron Systems Inc. and Newbridge Networks Corp. have all seen their stock prices fall more than 50 percent since last September.

And with the mergers that have taken place, some of those companies may need some help going forward.

Nortel, of Brampton, Ontario, and Lucent also have more power to compete now against companies such as 3Com and Cabletron.

"I would suspect that there would only be Cisco [Systems Inc.] and a couple other players left on the data side over the next 12 to 24 months," Johnson said. "The likes of Cabletron and several other players will probably be in the offing, whether or not a deal is consummated."

Topics: Networking, Cisco

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