Lucent/Ascend merger creates broadband giant

Feb. 1, 1999

Lucent/Ascend merger creates broadband giant


The merger of telecommunications giant Lucent Technologies (Murray Hill, NJ) and wide area networking leader Ascend Communications Inc. (Alameda, CA) positions the combined entity as potentially the most formidable player in broadband communications networks.

OWhen you combine the data networking business of Lucent and Ascend, the optical business of Lucent, as well as the communications software and the services and support to deliver that value to customers, on day one of the merger this is the largest broadband networking business in the world by far,O said Rich McGinn, chief officer and chairman of Lucent, during a press conference to announce the agreement.

OThis is the next logical step for us in a constant and swift evolution of Lucent to be the company best able to rapidly meet the changing needs of customers around the world for converged communications networks?broadband networks,O he said.

Ascend Communications is active in Asynchronous Transfer Mode (ATM), frame relay, and remote access network technologies and products for service providers. The company reported $1.2 billion in revenues in 1997 and employs about 2500 people worldwide. It also has established relationships with carriers and Internet service providers, such as MCI/WorldCom, Sprint, Williams, and PSINet, that are attractive to Lucent as potential customers, according to Dan Stanzione, Lucent chief operating officer and president of Bell Laboratories.

The combined company is well positioned to deliver Othe next-generation public network,O stated Mory Ejabat, Ascend chief executive. OThat network is a packet-based infrastructure that integrates data, voice, fax, and video communications and delivers exciting new services like VPN [virtual private network], ATM, frame relay, IP services, and voice over IP.O Ejabat will remain with the company through the transition period.

With the merger, Lucent will form a Broadband Networks Group that will be lead by Stanzione. The new unit will include Ascend and Lucent?s Data Networking Systems, Optical Networking, and Communications Software Groups.

OA year and a half ago, we laid out our data-networking strategies and said we would fill in spaces as needed to meet our goal of leader in this area,O said Stanzione. OIn 18 months, Lucent has acquired 11 companies and released 30 products as part of that strategy.O

The merger will allow Lucent to compete in places where it has been less strong as well as open up new opportunities for existing customers, noted Stanzione. Lucent will take advantage of cost synergies and eliminate some duplicity in product development.

Prior to the acquisition, Lucent and Ascend had worked as partners to supply communications solutions to major customers like Bell Atlantic. Lucent also uses Ascend?s GX550 Core ATM Switch (which started shipping last fall) in its networks.

The merger should benefit Lucent in the data-communications arena. Ascend is a global leader in supplying WAN core switching and remote-access technology to service providers, analysts note. Two-thirds of Lucent?s business is in the service provider area, and the company?s strategy is to enhance its position within this market, said McGinn. Lucent is also pursuing the global communications market?which to date represents 25% of the company?s revenue?in the wake of telecommunications deregulation in many countries.

OThe challenges are going to be integrating research and development and product initiatives that have been going in parallel in the Lucent and Ascend organizations,O says Achmad Chadran, senior analyst, telecommunications hardware at the Aberdeen Group (Boston, MA). OBut I don?t think there are any significant overlaps in that regard. And Lucent in the past has proven pretty adept in plugging in strategic pieces from their acquired companies and plugging them into their own systems as a means of addressing legacy network issues in addition to adding to their client base.O

OIt holds an awful lot of promise on bringing IP [Internet protocol] and ATM switching technology much closer to the optical layer,O adds Chris Nicoll, principle analyst, Current Analysis (Sterling, VA). OCertainly, Lucent has a very complete optical portfolio that none of the other wide area network technology vendors can match. Nortel is positioned at the very, very high-end. At the lower-end, they?ve got the metropolitan area system, but not really anything for the wide area network and the carrier-based networks.O

OIf Lucent is able to truly marry the DWDM along with the IP and ATM switching, they can flatten the networks, which should make them more efficient,O observes Nicoll.

The Lucent/Ascend merger represents the latest in a series of high-end mergers and partnerships among companies looking to create product lines that reflect next-generation network realities. For example, Nortel Networks acquired data-networking company Bay Networks and Cambrian Systems Corp. in 1998. Leading data-network provider Cisco Systems Inc. currently partners with Ciena Corp. for optical technology. Lucent?s goal is to be able to offer an end-to-end solution for broadband multiservice communications networks to a global customer base. OThat?s a holy grail for a vendor like Lucent, and the merger certainly does further the cause,O says Aberdeen?s Chadran.

Under the terms of the agreement, which at press time were still subject to approval by the boards of the respective companies, each share of Ascend will be converted into 0.825 shares of Lucent, in a transaction valued at roughly $20 billion. The merger is expected to be completed in Lucent?s fiscal third quarter, which ends June 30, 1999, pending Ascend shareholder approval. Lucent expects the merger to have neutral impact on its earnings in fiscal 1999 and to become accretive in 2000. q

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