New owner to unleash Bellcore expertise

Jan. 1, 1997

New owner to unleash Bellcore expertise


After being put on the selling block more than a year and a half ago, Bell Communications Research (Bellcore) Inc., the renowned global provider of telecommunications information networking software, engineering, and consulting services in Morristown, NJ, has been sold for a reported $700 million by its owners--the seven regional Bell operating companies (rbocs), which include nynex, Bell Atlantic, BellSouth, Ameritech, SBC Communications, US West, and Pacific Telesis.

The new Bellcore owner, Science Applications International Corp. (saic), in San Diego, was founded in 1969 by a small group of scientists to provide research and engineering services to U.S. government agencies. Today, it is a diversified research and engineering company that offers expertise in computer system and product development and integration and technical support services in national security, systems integration, environment, energy, health care, transportation, telecommunications, and space. Presently, saic has 22,000 employees, annual revenues of $2.4 billion, and more than 475 locations worldwide.

Formed in 1984 as a jointly owned research and engineering consortium to support the rbocs, Bellcore currently has approximately 5600 employees worldwide, annual revenues exceeding $1 billion, and more than 600 domestic and foreign technical patents.

Consummation of the sale is expected to occur sometime in the latter half of this year, subject to the approval of at least nine states and possibly the Federal Communications Commission (FCC).

Industry analysts generally graded the Bellcore sale to saic with high marks because of the strong engineering expertise, experience, and accomplishments of both companies. On the other hand, they questioned whether Bellcore will be able to compete successfully in the now highly cost-conscious telecommunications market after being subsidized by its rboc owners for a dozen years.

Executives from both Bellcore and saic vigorously emphasized that Bellcore would keep its highly rated research and engineering mission, management team, and employee structure intact; continue as leaders in creation and development of groundbreaking communications technologies; and expand its telecommunications networking software, engineering, and consulting expertise into new worldwide markets.

Official outlook

Presenting their respective companies` viewpoint of the buyout during a national audio press conference were Marty Kaplan, president of network services group, Pacific Bell, and spokesperson for the Bellcore board; William A. Roper, Jr., saic senior vice president and chief financial officer; and George Heilmeier, president and chief executive of Bellcore.

In the conference`s opening remarks, Pacific Bell`s Kaplan said, "[The sale of Bellcore] is a logical extension to the sweeping changes in the telecommunications industry, which were brought on by regulatory changes, market demand, and technological innovations. These changes have altered the basic assumptions that guided Bellcore`s original ownership structure. At the time of Bellcore`s formation on January 1, 1984, the rboc owners commonly shared similar telecommunications engineering, administration, and deployment needs.

"While our needs for Bellcore products and services continue, these needs are, in most cases, unique to our own companies, rather than common across all seven [rbocs] as they were in the past. In recognition of these changes, on April 13, 1995, we announced that we would explore a variety of options relative to Bellcore`s future ownership, including a possible sale of the company. We considered a combination of factors before ultimately selecting a buyer that was manageable with our short- and long-term strategic interests for Bellcore and for ourselves, including compatibility of technical effort, financial capacity to acquire the business, vendor neutrality, freedom from regulatory and judicial restrictions, and most importantly, the continued ability to meet the needs of the owner companies.

"After careful deliberation, we selected saic, which we felt best met the conditions we placed on the future ownership. We look forward to a continued productive relationship with Bellcore and the ability on a continuing basis to have access to one of the world`s premier communications software, engineering, and consulting companies," said Kaplan.

The next speaker, saic`s Roper declared, "This acquisition offers tremendous business growth opportunities to our combined firms, and expanded career opportunities for both Bellcore and saic employees. Saic is involved in a number of telecommunications-related markets in both the United States and Europe, and these markets and customers complement Bellcore`s recognized position as a developer of large-scale, world-class telecommunications solutions.

"Bellcore`s customers, including the regional operating companies, are a sizable and challenging market, and by joining our experience, will better serve our combined customer bases. Both Bellcore and saic have in-depth knowledge of large-scale software systems and their reliability requirements. The Telecommunications Reform Act of 1996 will permit us to serve cable suppliers, long-distance providers, equipment companies, and major government customers in new ways that neither of us could accomplish alone.

"In doing so, saic will bring Bellcore`s telecommunications expertise to our government customers and Bellcore will bring saic`s technology in systems integration expertise to their current customers. From the point of view of technology and marketing, this is an excellent deal," concluded Roper.

The last speaker, Bellcore`s Heilmeier, pointed out, "For the past 13 years, Bellcore has enjoyed and benefited from a strong relationship with its seven rboc owners; but like our current owners, we too have felt the impact of increased competition, rapidly changing technical needs, and the diverging business strategies of our owners. For this reason, several years ago, we initiated a major effort to commercialize business processes here at Bellcore, create a market-driven culture, provide more customized solutions, and expand our market presence, both domestically and internationally.

"As a result of this effort, we now provide communications software, engineering, and consulting services for more than 800 customers worldwide, as well as to our seven owners. We have a growing international presence with sales and marketing offices throughout the world.

"We now offer commercial products for the Internet, wireless communications, and full-service multimedia networks of the future. We have continued to build on our domestic and international pattern port folio, which now has more than 600 patents worldwide.

"As a member of the saic family, we will continue to provide our customers, including our current owners, with the innovative communications software and professional services they have come to expect. As part of the saic team, we see further opportunities for growth and synergy in the telecommunications industry as well as other markets where saic is already active," said Heilmeier.

Open market issues

The major problem for Bellcore, say analysts, is whether the researcher can play a leading role in the non-familiar open competition environment brought on by the Telecommunications Act of 1996. According to Michael Smith, lead analyst, network services, at Datapro Information Services Group in Delran, NJ, "For the first time in its history, Bellcore will be completely reliant upon its ability to market its products and services. It will no longer have a captive audience, namely, the rbocs, for its research efforts. The company has an impressive portfolio of offerings, however, and has a rich history in the telecommunications industry.

"Key market opportunities for Bellcore include the needs for local number portability [LNP] in the United States, local network interconnection, and the unbundling of local network elements. Having played a pivotal role in the design of the intraLATA [intra-local access and transport area] networks in the United States, Bellcore is uniquely well-positioned to provide the products and services to drive their upgrades, including LNP databases.

"A key determinant of Bellcore`s future success will be saic`s considerable experience in competitive bidding situations. This experience will be critical as Bellcore is forced to compete for the business of each of its customers moving forward," added Smith.

An ex-employee of Bellcore, Ronald Cowles, manager, research and development, at Northern Business Information in New York City, offers an inside perspective. He appraises the sale of Bellcore to saic as only benefiting Bellcore, or what remains of Bellcore, particularly from a consulting standpoint. Cowles observes, "Bellcore led the Bell operating companies [BOCs], as well as the local exchange industry, through the divestiture of AT&T by directing, developing, and, for the most part, implementing the processes to provision, install, bill, cost, price, and tariff services under a divested environment. The BOCs rewarded Bellcore by selectively picking much of its talent for BOC senior manager and executive positions to bring these services in-house. The remaining employees then had to transition Bellcore from a leadership role to a subordinate one for its owners.

"Because of the BOC ownership relationship, Bellcore must comply with FCC cost-accounting rules, which mandate its pricing policies and make it uncompetitive with other consultants. Because these rules require that Bellcore costs be made public, Bellcore expenses have been the focus of many [state and federal] regulatory proceedings and have been subject to greater reductions by the BOCs than other consultant costs.

"Due to the BOC ownership relationship, Bellcore`s consultation opportunities outside the BOC community have been limited from providing any advantage to BOC competitors or regulators and by the wariness of others of Bellcore`s ability to be neutral. Even though talent is available, the BOCs cannot use Bellcore for various strategic studies, such as economic, strategic, and legal support for price-cap regulation, because they must look for `independent and neutral` expertise to convince regulators of their positions.

"However, all of these ownership constraints will go away as a result of the sale to saic. What remains to be shown is whether Bellcore can be cost-competitive and properly focused to be a competitive cost consultant, and whether it can retain the talent sufficient to provide the necessary services for the participants in the evolving telecommunications marketplace," cited Cowles. q

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