Visual Networks to buy Avesta

Larger-than-expected impact on earnings sends stock down

February 08, 2000|By Mark Ribbing | Mark Ribbing,SUN STAFF

Visual Networks Inc., a Rockville telecommunications software company, said yesterday that it has agreed to buy Avesta Technologies Inc. in an all-stock deal initially valued at $415 million.

Wall Street reacted harshly to the announcement, sending Visual Networks' stock down $13.0625 to $50.3125, a 20.6 percent decline.

What worried investors was the news that the purchase of privately held Avesta will pull down Visual Networks' earnings through the end of next year. While Visual Networks Chairman, President and Chief Executive Officer Scott E. Stouffer said the acquisition would ultimately lead to "dramatic acceleration of [Visual Networks'] growth," he conceded that it will rip a temporary but significant hole in his company's bottom line.

He said earnings for this year, originally estimated at 84 cents per share, are now likely to be around 44 cents. For next year, initial earnings expectations of $1.20 per share are going to be reduced to about 93 cents.

The company said the addition of Avesta, which has yearly earnings of $30 million, will begin boosting Visual Networks' earnings in 2002. The combined companies expect to take in revenue of $230 million next year.

Analysts had expected Visual Networks to make an acquisition, and knew that New York-based Avesta was a likely target. However, they were disappointed by the scope of the damage that the deal would do to Visual Networks' bottom line.

Richard J. Sherman, an analyst with Janney Montgomery Scott LLC in Philadelphia, said the investment community had expected a purchase that would dilute Visual Networks' earnings for maybe three months, not the eight months that will be the case now.

However, Sherman said he gives Visual Networks "very high marks" for pocketing Avesta.

"This is an important cog in the equation that Visual Networks had to add somewhere down the road," Sherman said.

Avesta's technology will allow Visual Networks to obtain more specific information about technical problems that arise on communications networks. For example, it could determine precisely which piece of equipment on a network is failing, and which customers would be affected by the glitch.

Both companies' directors approved the deal, which is to close this spring. It still must gain shareholder approval.

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