Lucent Technologies and Ascend Communications have signed a definitive agreement to merge, the companies announced yesterday.
Under the terms of the agreement, which has been approved by both companies' boards of directors, each share of Ascend will be converted into 0.82 shares of Lucent, according to a joint statement. Based on Lucent's closing share price on Tuesday of $US107 7/8, the transaction is worth about $20 billion, the companies said.
The transaction will most likely be completed during Lucent's third quarter, ending June 30, 1999, the statement said. It will be accounted for as a pooling of interests and Lucent said it expects the merger to be neutral to earnings in fiscal 1999 and accretive starting in fiscal year 2000.
The merger is designed to broaden Lucent's ability to sell next-generation networks to telecommunications carriers, officials said.
"This is the next logical step for us in a constant and swift evolution of Lucent to be the company best able to meet the rapidly changing needs of customers around the world for converged broadband communications networks," said Rich McGinn, Lucent's chairman and chief executive officer (CEO).
Lucent wants to take advantage of the enormous and growing market for communications networking products and services, estimated at nearly $US400 billion in 1999 and expected to grow to $650 billion in the year 2001, McGinn said.
"Communications networking is more than the Internet, more than data and more than voice networking: it's delivering ... a set of network capabilities that lets customers build and deploy networks that encompass data, voice, video and fax in wireless and wired form," McGinn said.
No other company can match the quality and breadth of the networking portfolio of the combined companies, said Mory Ejabat, the president and CEO of Ascend. Ascend's product portfolio includes WAN (wide area network) core switching and data networking equipment for telcos, Internet service providers (ISPs) and enterprises. Ejabat will stay on during a transition period in an unspecified role, according to a statement put out by the companies.
"This merger clearly positions Lucent to lead in communications networking. It's no overstatement to say that no one understands the challenges of integrating voice, data, fax and video services better than the Lucent and Ascend teams together," said Dan Stanzione, Lucent's COO and president of Lucent's new Broadband Networks Group, during the teleconference.
In addition to getting complementary technology from Ascend, Lucent is also gaining access to customers, he added.
"Ascend has very strong relationships in the service provider space. While Lucent is a premier supplier to service providers, there are also places where Ascend will open even more doors for us," Stanzione said, mentioning companies like MCI WorldCom, Sprint, UUNet and PSINet.
"This will allow us to compete in places where we in Lucent have been less strong and open up new product opportunities for existing customers," Stanzione added.
The merger was a natural thing for Lucent, he said.
"Just as our customers are converging their networks, we're converging internally to seize that opportunity and to better serve our customers around the world," Stanzione said.
A networking revolution is developing and it involves not only data, but also optical technology, software and services, Stanzione said.
The companies will eliminate duplicate development in some product lines, he added.
At the core of the companies' combined portfolio is Ascend's ATM WAN switch for service providers - the Ascend GX 550 - and Lucent's PacketStar IP Switch family of IP-based switches for service providers, officials said. Other products in the Lucent/Ascend portfolio include the Ascend CBX 500 ATM family of switches, the Lucent MX1000 multiservice switch, due this year, Ascend's frame relay switches, along with network management products and service and support from both companies, officials said.
Analysts said this deal makes a lot of sense for both companies.
"There are some pieces missing in the Lucent data communications portfolio and this acquisition manages to fill some pretty important holes," said Virginia Brooks, vice president of networking and telecommunications at Aberdeen Group, a market research and consulting firm in Boston.
Specifically, Lucent is adding to its portfolio much-needed ATM and frame-relay products from Ascend, Brooks added. Lucent is also getting a solid customer base in the top-tier Internet service provider (ISP) area, Brooks said.
The deal highlights the inevitable convergence between the world's networking vendors and telecommunications products vendors, which prompted the similar mega-merger recently of Nortel and Bay Networks, Brooks said.
"For Lucent to remain competitive, it needs the pieces that Ascend is bringing. And Ascend couldn't do it any better on their own than Bay could," Brooks said.
Now that Lucent has strengthened its networking product portfolio, networking giant Cisco Systems faces one of its biggest challenges ever, another analyst said.
"Cisco should be very worried" because Lucent is now a player in Cisco's core markets, said Tom Nolle, president of CIMI, a consultancy in Voorhees, New Jersey.
Although it remains to be seen how well Ascend's corporate culture meshes with Lucent's way of doing business, Lucent has shown an ability to work well with other technology-oriented companies, another analyst said.
"Lucent has a very good reputation for being friendly to technology-driven companies," said Robert Rosenberg, president of Insight Research, a telecommunications market research firm in Parsippany, New Jersey.
Moreover, Ascend users shouldn't worry about how Lucent will steer the development of Ascend products, Rosenberg added.
The merger is the latest step by Lucent to boost its presence in the data networking business. In the past two years, it has acquired 11 companies in data networking technologies, developed intelligent switching, access and network management products internally and signed a number of partnership deals for sales and distribution, the company said.
Earlier this week, Lucent announced that it would acquire privately held Kenan Systems, which makes third-party billing and customer care software, in a stock deal valued at about $US1.48 billion.
Ascend's organisation and Lucent's Data Networking Systems, Optical Networking and Communications Software groups will be put together to form the Broadband Networks Group, which will be led by Lucent's Stanzione. The unit will focus on selling broadband, multiservice networks, according to the statement.