Lucent-Ascend Rumor Catches Industry Wave
Growing demand for networks specifically designed to carry voice and data traffic is fueling a wave of consolidation in the $200-billion telecommunications equipment industry, leading to rumors of a $16-billion deal between Lucent Technologies and Ascend Communications.
The two companies declined to discuss the possibility of a merger Monday, but analysts said it’s only a matter of time before they combine--with each other or in separate deals. That’s because companies that want to get a jump-start on their competitors are looking to quickly expand their capabilities through acquisitions.
“You’re seeing the voice world and the data world collide,” said Michael Davies, vice president of Punk, Ziegel & Co. in New York. “Voice will make up less than 10% of overall network traffic in the next five years. Wouldn’t it be best to have a single network infrastructure to carry both traffic over the same pipe?”
In most cases, data now are squeezed onto telecommunications networks that were designed to handle ordinary phone calls. But today’s Internet technology promises a more efficient way to carry both voice and data.
For Lucent, a deal with Alameda, Calif.-based Ascend would give it a strong position in the critical area of switches that can accommodate voice, data and video traffic on a single network and guarantee that phone calls will sound as good as they do on traditional networks. That would make the Murray Hill, N.J.-based AT&T; spinoff a more formidable rival to Cisco Systems, the leading provider of data-networking equipment.
Lucent spokeswoman Paula Horii said the company wouldn’t comment on merger rumors, but she said it plans to build its data-networking business to respond to “the whole communications-networking revolution.” Ascend spokesman Tim Donovan said his company is “not on the block.”
Those statements didn’t stop analysts from predicting that a series of mergers will produce a handful of companies that could provide equipment for data switching, access and transport. Today, no single company can offer that array of technology.
Over the last 15 months, networking companies have been using mergers to build up their assets. The biggest union was last summer’s $7-billion merger of Canada’s Northern Telecom and Bay Networks of Santa Clara, Calif., creating Brampton, Canada-based Nortel Networks.
Lucent itself took a $1.5-billion step in the consolidation race Monday by buying Cambridge, Mass.-based Kenan Systems, a private firm that makes third-party billing and customer-care software.
Buying Ascend is “exactly what a company like Lucent needs to do,” said Jeffrey Kagan, an Atlanta-based telecom consultant. “The kind of equipment and services needed for the next 100 years will be for data, not voice communications.”
Indeed, technology newsletter editor Michael Murphy said he expects Lucent to make a separate bid for Santa Clara-based networking giant 3Com.
“They need more products to compete with Cisco,” said Murphy, whose California Technology Stock Letter is based in Half Moon Bay, Calif. “If Lucent buys both 3Com and Ascend, they pretty much have the whole product line they need for voice and data.”
Cisco spokesman Doug Wills said the company expects to buy about half a dozen companies focused on data, voice and video integration over Internet-based networks between now and November, but he declined to discuss specific acquisition targets.
Ascend’s expertise in the increasingly critical area of asynchronous transfer mode, or ATM, switches makes the company attractive to several potential suitors, analysts said.
Ascend has a particularly good record selling to Internet service providers, new local phone companies and new voice and data carriers such as Qwest Communications in Denver and Level 3 Communications in Omaha.
“If you look at our industry right now, we sit in the sweet spot,” said Ascend spokesman Donovan.
Despite Donovan’s prediction that Ascend will remain independent, some analysts believe the company is too narrowly focused to survive on its own.
Although Ascend could try to grow through acquisitions of its own, many analysts said the more likely outcome is for Ascend to be acquired itself.
In addition to Lucent, telecommunications equipment makers Ericsson of Sweden and Alcatel of France would fit well with Ascend, Davies said.
So would Cisco. Davies said it could be worth it for Cisco to make a bid simply to keep Ascend out of Lucent’s hands.
Ascend stock prospered from the merger talk Monday, gaining $5.25 to close at $76.69 in Nasdaq trading. Shares of Lucent fell $2.31 to $112.94 on the New York Stock Exchange, and Cisco shares lost $2 to end the day at $104.69 on Nasdaq.
Kaplan reported from Los Angeles and Piller from San Francisco.
