U.S. Report: Nortel buys Bay creates $17bn networking titan

In one of the biggest networking deals ever, Northern Telecom yesterday announced it would acquire Bay Networks for about $9.1bn (£7bn)

The widely anticipated deal creates a $17.7bn (£13.6bn) company that will be able to handle data and voice traffic over LANs, WANs and carrier backbones. It alters the data networking landscape markedly from being dominated by four companies (Bay, Cisco , Cabletron and 3Com) to one that finds Nortel, Lucent Technologies and Cisco in command of the great middle ground between data and voice networking.

"This saves Bay a lot of heartache of having to compete with Cisco," said analyst Maribel Lopez of Forrester Research in the U.S. adding that Bay would have fared poorly against Cisco and that the Nortel/Bay move brings convergence to the center of the networking world. "The data comm field has changed," Lopez said. "Now it's Nortel and Lucent versus Cisco."

Bay had been the subject of speculation as an acquisition target for some time, with Ericsson and Lucent also mentioned as possible suitors. The networking company recently announced a reorganisation combining its Internet and Telecom Business Group with the Enterprise Business Group, a move that many industry observers saw as the prelude to a merger announcement.

The stock swap calls for Bay shareholders to receive .60 of a Nortel share for each Bay share they own. The deal will be tax-free to shareholders.

Bay will become a wholly owned subsidiary of Nortel, although Nortel will combine its enterprise data networks business with Bay. Nortel CEO John Roth will continue in that position, while Bay CEO Dave House will become president of Nortel. "Because of the lack of overlap, we can focus strictly on meeting the needs of our customers, not on rationalising the combined business," Roth said in a statement. "With this transaction, Nortel and Bay Networks will effectively break out and redefine the centre of the information industry - the unoccupied space where data and voice networks, driven by the Internet, are expected to converge."

Nortel said the deal should close in the third quarter and should lower earnings per share in 1998. But the deal will bump up earnings in the following year. "It's a good thing for Bay," said Rob Emerson, a Bay user at Computerland, an ISP in the U.S. "Bay's a good company that needs better leadership. It doesn't bother us [that this is now a huge company]. We expect our relationship with them to just go on."

Data vendors Cabletron and 3Com now find themselves competing more with each other than with Bay and Cisco, and, in Cabletron's case, working with the data/carrier conglomerates.

A Cabletron official said the company's relationship with Nortel's voice and broadband groups is moving forward as planned. Cabletron views this as similar to a deal it had with Xylogics, the official said. That company was bought by Bay but Cabletron retained its partnership.