US Report: Nortel and Bay downplay product overlap

Northern Telecom CEO John Roth and Bay Networks CEO Dave House this morning took turns saying as little as possible as they fielded questions from industry analysts during the first of what will be many joint conference calls.

Yesterday, Nortel announced it would acquire Bay for about $9.1bn (£7bn).

The 45-minute call consisted mostly of the two men rehashing their product lines and talking about the lack of overlap in them.

Even so, Roth said 25 percent of his company's business came from enterprise customers - Bay's strong suit. And House noted that "Bay has made very significant investments in the telco space". Moreover, Nortel's recent acquisition of Aptis Communications provided it with the CVX-1800 concentrator, which is in many ways a competitor with Bay's new Versalar 15000 IP switch.

"Both have remote access equipment," said Frank Dzubeck, an analyst at Communications Network Architects, in Washington. "Both have cable plays. Both have DSL [digital subscriber line] plays going and network management plays going. Nortel has a relationship with Shiva Corp. [for enterprise access and VPN equipment]. That's gone now. It will go to [Bay's acquisition], New Oak Communications. There's an awful lot of overlap that existed."

But the acquisition does not really involve overlap, according to House, because "the acquisition is one big jump into the centre [between carrier class and enterprise equipment]. We've moved ourselves into a strategic position that others are not moving to at this rate - at the rate the Internet moves".

Roth echoed the sentiment. "This is the new space," he said. "If you look today, IP competency in backbone networks does not exist anywhere. The transition, the discontinuity that will take place in all carrier networks as backbones get optimised for IP, is something no vendor today is skilled at. Nortel is learning very quickly how to do it, but we need Bay for their IP expertise. The challenge Dave and I have is to bring the expertise across the Nortel portfolio."

Roth and House cited projected 18 percent growth in enterprise networking to $50bn (£30.7bn) in 2001, a $30bn (£18.4bn) burgeoning voice-data market and a $250bn (£153.4bn) carrier market as economic motivators for the deal. But the overriding factor is the growth of IP usage. Roth said IP is nearly 50 percent of backbone traffic now and is growing at 30 percent a year.

According to Roth and House, the first two housekeeping tasks will be to wrap Nortel's enterprise data unit into the Bay division of the company and to mesh the two companies' research and development. Both companies invest about 14 percent of their revenues in R&D, Roth said. He noted that Nortel, intends to continue with its Cabletron Systems partnership.

Although the acquisition will be completed in 90 days, Roth, who continues as Nortel's CEO, and House, who becomes president of Nortel, said they will now pursue acquisitions of smaller companies to fill product holes.

"It wouldn't be appropriate to disclose our shopping list or the prices will go up," Roth said, declining to comment on what product areas need to be filled.

House rejected a long-standing rumour that Bay would consolidate its operations at one geographic location. Both men ignored a question about the implications the merger would have on job consolidation.