Is Alcatel buying its way to the top?

DALLAS - Alcatel has been on a buying spree that would make acquisition-happy Cisco proud.

The French carrier equipment supplier has spent $7 billion on five U.S. companies over the past 12 months, including $180 million earlier this month on Internet Devices, which makes the Fort Knox line of policy routers.

What's behind all these buyouts? Two things: Alcatel is looking to increase its U.S. presence and wants to better position itself to grab a big piece of the IP network pie.

"Technology is moving so fast, so when it becomes clear that we have a hole and need to plug it, we will go purchase something," says Krish Prabhu, CEO of Alcatel USA.

"Alcatel seems to be making the right strategic moves by acquiring data products to compete with Lucent, Cisco and Nortel Networks, as well as Europeans Siemens and Ericsson," says Ron Westfall, an analyst with Current Analysis in Sterling Va.

New gear will attract carriers

Prabhu says the purchases will let the company sell into carrier and enterprise networks and support the exchange of voice and data traffic between those networks. Alcatel says the enterprise gear should prove increasingly attractive to carriers looking to offer managed services that include a customer premises equipment component.

Since last June, the company has bought service provider equipment suppliers DSC Communications and Assured Access Technology, as well as Packet Engines, Xylan and Internet Devices, which are mainly enterprise network equipment suppliers.

Buying DSC gave Alcatel an in with major U.S. carriers that use DSC trunking switches, though the purchase did nothing to advance Alcatel's IP strategy. The deal has roughly doubled Alcatel's U.S. carrier sales to $3.5 billion, Prabhu says. "In the service-provider [market], that puts us very close to Cisco in terms of revenue," he says.

Assured Access brings carriergrade access concentrators that can take in IP and other traffic over dial-up and dedicated circuits. In combination with Alcatel's digital subscriber line (DSL) gear, Alcatel can support most services that enterprises might use to access carrier networks.

The Assured Access gear should also make Alcatel less reliant on Ascend, which is now part of Lucent. Alcatel will now sell Assured Access concentrators instead of Ascend TNT boxes.

Similarly, Alcatel's Xylan and Packet Engines acquisitions give it products to sell instead of the gear it currently resells from Cisco, increasingly a competitor.

Alcatel says its acquisitions of Xylan, Packet Engines and Internet Devices will not only let it address the needs of enterprise customers, but also meet the growing needs of carriers offering managed services.

For example, Alcatel will look to supply carriers with Xylan ATM OmniSwitches, which could be located at customer sites as part of a managed service. The devices could take in IP and other traffic from customer sites and deliver it to carrier nets via ATM pipes.

Alcatel plans to take policy-based router and management software from Internet Devices and put it into Xylan and Packet Engines hardware. Such technology could be used by enterprises and carriers to support quality-of-service levels, Prabhu says.

Alcatel says it is not finished with acquisitions, though the pace of its purchases will likely slow.

The company needs a terabit core router, such as those made by Pluris and Nexabit, and it needs a switch that can mediate between voice and data networks, such as the gear made by Salix and Convergent, Current Analysis' Westfall says.

Alcatel also needs cable modem technology to complement its DSL products for widely available broadband access.

Alcatel could get that expertise by buying companies such as Com 21 or Terayon, Westfall says.

When all its previously announced acquisitions are complete, Alcatel will have nearly 9,000 employees in the U.S. This presents a management challenge, but Alcatel's strategy is to keep those new employees, with the exception of DSC's, isolated in one division called the Internetworking Group.

"That solves some of the problem of cohesion and the problem of companies on the West Coast that are used to a start-up culture," Prabhu says.