Experts ask: Is Bay in play?

By Jim Duffy
Network World, 5/18/98

Reports that Bay Networks Inc. refused a buyout offer from Nortel spiked Bay's stock by 16 percent this week and whipped up a flurry of rumors and speculation.

Bay and Nortel officials would not comment, but sources said Nortel wants to announce a Bay acquisition at the Supercomm 98 show in Atlanta June 8.

The amount of the alleged Nortel offer is not known, but sources say it was between US$32 and $35 per share, or $7.3 billion to $8 billion. Bay shares are currently trading at $26.38.

Observers believe Bay will agree to be acquired for $40 per share, or $9.1 billion. The company's market cap is currently $5.5 billion.

The time is now at hand for Bay, Cabletron Systems Inc. and even perhaps 3Com Corp. to woo a telecom suitor in order to compete with Cisco Systems Inc. in the voice/data megabattle of the next millennium.

Cisco is the pre-eminent supplier of IP routers for the enterprise and service provider markets. The network giant became an instant force in WAN switching with its $4 billion purchase of StrataCom Inc. two years ago.

With the industry moving toward converged voice and data over IP networks, Cisco is entering the ranks of the Nortels, Lucents, LM Ericssons and Siemens AGs of the world and leaving its Big Four brethren behind. But while Cisco chases Nortel, Lucent Technologies, Inc. and others, Bay, Cabletron and 3Com are still chasing Cisco.

Unfortunately, Bay, Cabletron and 3Com lack the financial, market and R&D where-withal to catch Cisco on their own, observers say. However, Nortel, Lucent and other telecom powerhouses lack data expertise.

It therefore behooves Bay, Cabletron and 3Com to beautify their enterprise assets to attract and marry one of the telecom heavies. And this week's alleged Bay/Nortel overture is yet another indication of the need to woo a suitor.

"It's symptomatic of the ongoing, continuing convergence of the voice and data world, and the pressures to establish a critical mass," said Andy Schopick of Nutmeg Securities. "I wouldn't dismiss [these reports] as being some ridiculous thing. If it's not Nortel [coveting Bay], it could be somebody else, and I think we will see one or two megamergers over the next six to 12 months in the networking arena."

"Bay's been in play the whole time," said Scott Heritage, an analyst at UBS Securities in New York. "This is not new. There's been speculation going on [about a possible acquisition] for the last six months."

Before this week's development, the popular belief was that Lucent would make a run at Bay, given that the companies have a multimedia technology sharing and joint product development partnership going back two years. More recently, Lucent acquired Yurie Systems, Inc., a maker of ATM access multiplexers, that Bay is reselling under an OEM arrangement.

Conversely, Nortel has been allied with Cabletron for more than a year in a "Power Network" partnership to build integrated voice/data multimedia networks. But analysts note this union has produced little, if any, power to date.

3Com, meanwhile, has a partnership with Newbridge Networks, Inc. and Siemens to deliver desktop-to-desktop class of service over IP networks.

Its relationship with Lucent aside, Bay might be better served to wait until October to wed a telecom company. October is when Lucent is allowed to use the pooling of interests method to acquire a company.

Pooling of interests allows companies to combine balance sheets and report higher earnings without tax impact. Lucent was prohibited from pooling for two years after being spun off from AT&T.

Not only would pooling be attractive for Lucent, it might raise the price for Bay because Nortel and Lucent could get into a bidding war for the company. Indeed, some speculated that any Nortel offer would be a preemptive move to swipe Bay from rival Lucent before October.

Users seem resigned to the prospect of Bay being snapped up sooner or later.

"It probably would just make them stronger," said Randy James, vice president of development at Community First Bancshares, Inc. in Fargo, North Dakota. 'It probably would make sense for a combination like that, but I don't see that there's any-thing [Bay is] lacking strategically."