Strong growth opportunities and the competition they spur are fueling a new round of deals in the consolidating network equipment arena. Redback Netbacks was thinking visual and value-added, Cisco Systems was going wireless and Broadcom was looking down-market when they announced purchases this week for hundreds of millions of dollars' worth of stock each.
The acquisitions of Abatis Systems, IPmobile and Altima Communications, respectively, came on the heels of a much larger deal: Nortel Networks' disclosed late last month that it is buying Alteon WebSystems for US$7.2 billion in stock. Nortel is competitively shoring up its offering to service providers to manage Web traffic.
"The common thread is extending market reach," said Frank Dzubeck, president of Communications Network Architects. "Every single deal is to extend themselves. It's called vertical growth. There's only so much you can grow horizontally [expanding existing businesses]. Vertical growth is new opportunities, new markets."
The deals are part of an ongoing saga in an industry that is growing explosively, is technologically treacherous and is hypercompetitive. The biggest companies are constantly trying to leapfrog one another by snapping up nimble and innovative start-ups. Nortel's purchase of Alteon, for example, was its ninth acquisition in 11 months. Cisco's purchase of IPmobile was its 16th such deal this year.
The Nortel-Alteon and Redback-Abatis mergers will help the companies satisfy the demands of telecommunications carriers and other customers to provide more sophisticated, value-added services to their business customers, in order to raise profit margins and increase customer loyalty.
Alteon www.alteonwebsystems.com makes specialty gear called content switches, which are growing in popularity by leaps and bounds with Web-site operators. The technology allows a site to connect a user with the server that can respond fastest. It also permits the site to give priority service to users based on how important or attractive they are as customers.
In its most recent fiscal quarter, Alteon's US$51.5 million in revenue produced US$7.4 million in profit. The purchase by Nortel www.nortelnetworks.com was widely seen as a direct response to rival Cisco's purchase in May of ArrowPoint Communications, which also developed content-switching technology.
Meanwhile, Redback www.redback.com sells service providers equipment to handle high-speed data traffic. It is buying Abatis www.abatissys.com for US$676 million in stock to gain technology that will allow telecommunications carriers and Internet providers to offer Web-based services, such as virtual private networks, as well as image-intensive applications such as movies-on-demand and videoconferencing. Redback's purchase followed shortly on giant Lucent Technologies' acquisition of Abatis competitor, Spring Tide Networks.
For its part, Cisco www.cisco.com went to the air. Its US$425 million catch, IPmobile www.ipmobile.com, develops software for wireless Internet connectivity via base stations. Cisco said associated research and development expenses would require a 3-cent-per-share hit to earnings the quarter the deal closes, which Cisco expects to be the fiscal period ending in October.
Broadcom's business extensions had less to do with the nature of its business and more to do with the size and location of customers. Broadcom www.broadcom.com, makes chips employed in high-speed communications, specifically in digital set-top boxes and cable modems. Altima www.altimacom.com makes chips for communications gear used mainly by small to midsized companies. Most of its sales are in Asia, and the company has a particularly strong presence in Taiwan, from which it also sells into China. Broadcom is paying US$561 million to buy Altima. ENDS
