Aggressive little players swallowed up Trend in Maryland manifested in deals for Ciena and Yuri

Defenders buy attackers

Merger frenzy fosters giants that prefer fewer, bigger vendors

Telecommunications

June 08, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

Like sumo wrestlers bulking up for combat, big telecommunications equipment companies are girding for battle by gobbling up smaller firms.

This trend has been starkly evident in Maryland. In little over a month, the state has seen two of its most promising young telecom-equipment makers get swallowed by larger companies.

Linthicum-based Ciena Corp., which makes devices that expand the capacity of communications networks, agreed last week to be bought by Tellabs Inc. of Lisle, Ill., for $6.9 billion.

Yurie Systems Inc. of Landover, a maker of gear that links companies to high-speed networks, announced April 27 that it was being purchased by Lucent Technologies Inc. for $1 billion.

Maryland equipment firms are hardly the only ones that are getting bought up. DSC Communications Corp. of Plano, Texas, which makes access and switching devices, agreed last week to become part of French manufacturer Alcatel Alsthom SA in a stock deal worth about $4.4 billion.

In a sense, the merger frenzy among telecommunications equipment firms is a reaction to the consolidations that have swept other sectors of the telecommunications industry.

Huge mergers like the recently proposed union of SBC Communications Inc. and Ameritech Corp. are creating enormous telephone carriers with equally enormous equipment needs.

To meet these needs, equipment makers have to be big and diverse. As Jeffrey Kagan, a telecommunications analyst based in Atlanta, put it, "It takes a giant to serve a giant."

Faced with high costs, fierce competition and increasingly complex networks, phone companies increasingly want to use just one equipment firm, rather than the jumble of vendors they've used in the past.

"If I go to any one of my carrier clients, what I find is that they've got 110 vendors on their network," Howard Anderson, an analyst with the Yankee Group in Boston, said. "They want fewer vendors and they want more from them."

In response to this demand, companies are seeking consolidations that give them a broad range of capabilities. For example, Ciena specializes in equipment that increases the capacities of networks, while Tellabs makes equipment that coordinates communications traffic as it moves from one network to another. Together, the companies will be able to offer a range of products that would have been difficult to develop independently.

"It's a case of players seeing what's in their portfolios and filling in the niches," said Bill Price, a spokesman for Lucent, one of the leading equipment firms.

For many of the established equipment companies, one niche that needs to be filled is a lack of cutting-edge technology. Yankee Group's Anderson divides the telecommunications equipment world into two camps, "defenders" and "attackers." Defenders, he said, are older firms such as Lucent, Alcatel and Tellabs, the builders of traditional communications equipment.

The attackers are such firms as Yurie, DSC and Ciena -- companies that are smaller and newer but often take a leading role in hot new technologies.

"What's happening is that the defenders are buying the attackers," Anderson said. "What we're seeing in the equipment sector is not the merger of equals."

He said there are many attacker firms that could be ripe for acquisition, such as Xylan Corp. and Summa Four Inc.

Another driving force in the merger wave is internationalization. The telecommunications market used to be divided into geographically distinct fiefdoms, with national or regional communications companies ruling their domain without competition. Technology and trade liberalization are changing all that. Increasingly, equipment companies must be able to compete on a multinational scale.

In such a far-flung competition, big companies have an inherent advantage. "To be a real global player in the future, you have to really have a lot of infrastructure in place. That requires a lot of money, quite frankly," said Ciena spokesman Denny Bilter.

Sprint Corp., the nation's No. 3 long-distance carrier, saw two of its key equipment vendors become one when Tellabs agreed to buy Ciena. "I see a benefit to us of having one larger company with a bigger portfolio to choose from," said Sprint spokesman Charles Fleckenstein.

Fleckenstein said he saw little risk that the spate of equipment mergers would limit options for his company and other big equipment customers. "There are too many [equipment companies] out there right at the present time" for consolidation to seriously restrict customer choice, he said.

Nor did he think the Ciena-Tellabs union would make the firms less responsive to Sprint's needs. "This [the proposed firm] is not such a big company that it will become unable to react quickly," he said.

Ciena's Bilter said he thinks the merger trend could result in an increasingly polarized telecommunications equipment industry. "It'll be interesting," he said. "There will be huge mega-players, and there'll be start-ups."

Ciena, of course, was an unusually prosperous start-up, one that itself occasionally acquired smaller companies in order to grow. However, it faced obstacles in going up against Lucent and other behemoths.

"It's hard," Bilter said. "The bigger guys can outlast you a long time with the resources they have."

Pub Date: 6/08/98

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