Update: Lucent to buy INS for $3.7 billion

By David Rohde and Jim Duffy
Network World Fusion, 08/10/99

Lucent's purchase Tuesday of International Network Services (INS) will help Lucent become one of the premier providers of network management services to enterprises.

But it also presents a risk to the company because the success of the $3.7 billion acquisition actually depends heavily on relationships with Lucent competitors such as Cisco.

Lucent executives conceded that the enterprise networks that Lucent's NetCare division and now INS will jointly manage will probably use competitors' data products rather than Lucent's.

That means relationships with these competitors will have to be kept up even as Cisco is at the same time moving into management services. Just this week, Cisco announced it will invest more than $1 billion in consulting firm KPMG LLP's Internet-related services business.

Lucent executives indicated little willingness to go out and spend more stock and cash on enterprise product companies to dislodge Cisco, Nortel Networks, 3Com and others from the very data networks they now propose to manage.

"Often customers have made their product choices before they seek professional support capability," said Lucent Executive Vice President Patricia Russo, who has headed up Lucent's aggressive acquisition strategy. "I expect [customers] will continue to do that."

Russo hastened to add that Lucent and INS professional-services sales staffers will be trained on Lucent's current enterprise data products, none of which currently command even 10% of their market segments despite generally good reviews. These include principally Gigabit and Layer 3 Ethernet campus switches, high-speed workgroup switches and a range of ATM gear, though Lucent lacks basic router and hub market entries.

The nearly simultaneous moves by Lucent and Cisco to invest money in professional and management services put INS CEO John Drew on the spot to explain how he will maintain INS' relationships with Cisco on Lucent's behalf. As of now, Cisco owns about 6.7% of INS, but Lucent is expected to close its acquisition of INS by year-end.

"I think it's realistic to expect that we'll have a realignment in our relationship with Cisco," Drew said. But he said he hoped this change will focus on corporate issues and not whether Cisco continues to refer customers to Lucent for professional services - now that Cisco itself will have a bigger piece of the service pie. "We don't want to see any interruption in the client relationships," he said, adding that INS historically has hung on to users for repeat business once it's gotten them.

For its part, Cisco lauded KPMG's ability to pump up Cisco's services prowess. "We chose to make an investment in KPMG's consulting business because KPMG understands how the Internet will reshape the future of all businesses," said Cisco President John Chambers in a statement. "KPMG played an integral role in moving Cisco's own business to the Web. Under this joint venture, our customers can now count on the Internet systems expertise of Cisco and the Internet solutions expertise of KPMG . . . to move their business to the Internet."

Cisco and KPMG expect to close their transaction next month.