Nortel today made it official - it will buy Bay Networks for $9.1 billion.
The deal, which comes after weeks of speculation, will merge Nortel's telecommunications offerings with Bay's LAN and WAN gear. The deal is the largest ever in the telecommunications and data fields.
Nortel said the deal will let it become the first vendor to offer IP-based networking able to reach from the desktop to the central office.
Bay will operate as a wholly-owned subsidiary after the merger. Nortel said it will integrate its Data Networks division with Bay. Bay CEO David House will become Nortel president.
"Users should closely watch the impact of this announcement on Bay and Nortel's existing partners, such as Paradyne, FORE and Cabletron," said Fred McClimans, CEO of consultancy Current Analysis, Inc. in Sterling, Va.
"While this has been rumored for several months to have been in process, its consummation will force others in the industry, like Cisco and Ascend, to rethink their own competitive positions in the market," McClimans said.
"The real key is the customer base and the channels that Bay brings that Nortel doesn't have, and obviously Bay has a couple nice point products in hot markets right now, " said Craig Johnson, principal at PITA Group in Portland, Ore., referring to Bay's Accelar routing switches and extranet switches for virtual private IP networks.
"Those two key pieces are very important, especially for a company that wants to go out and compete against the Lucent's of the world and the Cisco's of the world."
Nortel and Bay products overlap in carrier-class access offerings, Johnson said.
"Dial access will be an overlap area; it will be interesting to see how they manipulate the product lines," he said. "(Nortel) bought the Aptis stuff which is a high-end telco access concentrator, and Bay is playing up in that realm also but it hasn't had very much success.
"It will be interesting to see how much of Bay survives another year down the road, meaning how much of Bay stays intact," Johnson said. "It should change the landscape."
Bay, which also courted Aptis, claims the Aptis gear is complimentary to its 5399 dial access concentrator because it is a higher-density offering than the 5399. The 5399 also has some software features not resident on the Aptis products, like voice over IP support, said Bill Hawe, Bay's chief technology architect.
Nortel's purchase price of $38 per share is more than three dollars less than Bay's 52 week high of 41.88. Bay investors say this indicates that Bay is in for another disappointing quarter. House said Bay is "comfortable" with revenue estimates of $585 million to $615 million, and profits of $.09 to $.12 per share for the fourth quarter, which ends this month.
Nortel and Bay have been in negotiations for a few months, Roth said.
House said Bay's technology sharing and resale arrangements with Nortel rival Lucent will continue. Bay resells Lucent's ATM access multiplexers, which Lucent obtained from its $1 billion purchase of Yurie Systems, Inc.
"We will continue to offer those products and we expect that some customers will continue to want to buy those products," House said.
However, he added that Lucent has been on a "string of pearls" strategy of replacing Bay products will those of companies Lucent's acquired. Roth said Nortel's "Power Networks" alliance with Cabletron Systems, Inc. will "carry on," as far as Nortel's concerned.
"The customers see value in the combination of Cabletron products and the rest of our portfolio," Roth said of the year-old alliance. "That is an excellent approach for us to go to market with. It will really be how Cabletron views and how they wish to move forward."
Sources: Nortel to snap up Bay by next month
Network World Fusion, 5/15/98.
Nortel to pay $290 million for data networking start-up
Network World Fusion, 3/19/98.
Nortel girds for net hardware battle
Describes Nortel's Enterprise Data unit. Network World, 3/2/98.