Northern Telecom to acquire Bay Networks in stock deal Phone equipment maker OKs purchase to obtain data-networking products


June 16, 1998|By BLOOMBERG NEWS

BRAMPTON, Ontario -- Northern Telecom Ltd., North America's No. 2 telephone equipment maker, agreed yesterday to buy Bay Networks Inc. for $9.1 billion in stock, acquiring the No. 3 maker of products to link computers to the Internet.

Northern Telecom will exchange 0.6 share for each Bay share, valuing Bay at $38.21 a share based on Northern's Friday close of $63.6875 in New York. Shares of Northern -- 51 percent owned by BCE Inc., Canada's largest telecommunications company -- dropped $9.4375 to $54.25, shaving almost $2 billion off the acquisition.

Northern wants the company for its data-networking products and distribution channels, although Bay hasn't kept pace with larger rivals Cisco Systems Inc. and 3Com Corp. Sales and profits of Bay have plunged this year as their competitors shipped newer products and slashed prices, forcing Bay to do the same.

"There's a concern they [Northern] are paying a premium for a second-rate company," said Andrew Martin, a portfolio manager at the investment management firm Davis-Rea Ltd., which owns more than 3 million shares of Northern's parent, BCE Inc.

After the transaction is complete, BCE's stake will shrink to 41 percent, while Bay shareholders will own 21 percent of the combined company.

Shares of Santa Clara, Calif.-based Bay rose $2.4375 to $30.75 yesterday.

The agreement is the third multibillion-dollar purchase this month involving telecommunication and data-networking companies. Phone equipment maker Tellabs Inc. agreed to buy Linthicum-based Ciena Corp. for $6.86 billion June 3, while French phone-equipment giant Alcatel Alsthom SA agreed to buy DSC Communications for $3.98 billion June 4.

Bay was once the largest maker of networking equipment, but began to struggle in 1996 amid intense competition from Cisco and 3Com. Bay briefly reversed its sagging financial fortunes in 1997 with a new computer switch, the 350T, which won a large share of the corporate market, but the turnaround didn't last.

For its fiscal third quarter ending in March, Bay's revenue fell 15 percent to $547.2 million from $644.9 million in the December quarter. Sales of the company's older networking gear made up 26 percent of total revenue, down from 29 percent the previous quarter.

Profit before charges slipped to $9.9 million, or 4 cents a diluted share, in the quarter ended March 28, from $20.7 million, or 10 cents, a year earlier.

When the transaction is complete, the combined company will have a work force of 80,000 and operations in 150 countries.

Northern, like rivals Cisco and Lucent, wants to sell more gear to phone companies and Internet-service providers, who need to expand their networks to handle growing Internet traffic.

Pub Date: 6/16/98

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