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Nortel Buys Alteon for Big Bucks

Light Reading
News Analysis
Light Reading
7/28/2000

Nortel Networks Corp. (NYSE/TSE: NT) announced today it plans to buy Web switch vendor Alteon WebSytems Inc. (Nasdaq: ATON) for $7.3 billion in stock, the largest deal for Nortel since they acquired Bay Networks in August 1998 for $9.1 billion.

If the deal sounds vaguely familiar, that isn't surprising. Slip the names Cisco Systems Inc. (Nasdaq: CSCO) and Arrowpoint into the appropriate slots, decrease the price by about $2 billion, and you might feel like you're having one of those deja vu experiences.

It was only three months ago that Cisco announced a similar deal with Alteon's arch competitor, Arrowpoint (see Cisco Finds A Soft Spot for ArrowPoint and Arrowpoint Gets Mixed Reviews). But what a difference a couple of months can do for a company's valuation. Cisco announced it was paying $5.7 billion for Arrowpoint on May 5, and today Nortel says it will pay $7.3 billion for Alteon, which last quarter nearly doubled its revenues to $51.5 million.

"They're insane for paying that much," says David Newman, president of Network Test Inc. "I think they both paid too much. Load balancing, at heart, is simple technology. I'm shocked."

Alteon, which develops Web switches, server adapters, and traffic management software, will help Nortel round out its Internet data center offerings. The company also comes with some big customers in the Internet arena, namely Yahoo! (Nasdaq: YHOO) and Exodus Communications Inc. (Nasdaq: EXDS), one of the largest Web hosts.

So who got the better deal? Cisco or Nortel? At the end of the day, the technology is very similar, according to Peter Christy, director and senior analyst for Jupiter Communications Inc. (Nasdaq: JPTR). And while the prices that both Nortel and Cisco have paid for these companies may seem outrageous at first glance, he points out that this has little to do with actual technology and more to do with market perception.

"These acquisitions aren't about products," says Christy. "Cisco bought Arrowpoint because it wanted what was perceived as a market leader. Alteon has some design wins and is also perceived as a leader." Alteon's strong marketing efforts have as much to do with the acquisition as the technology, concurs Newman. "Selina Lo [Alteon's VP of marketing] has done a very good job," he says.

Indeed she has. When Alteon Networks first began back in 1996 it pushed its gigabit Ethernet technology as its main selling point. But as GigE started to look like another commoditized area, Lo helped the company rethink its strategy and add applications on top of its super fast ASICs. The company was then renamed Alteon WebSystems in April 1999 and went public that September.

It seems as though Alteon picked the right trend in the industry to follow. International Data Corp. forecasts the market for content-aware switching to grow to more than $4 billion by 2004 (althought that's still $3.3 billion less than Nortel plans to pay for Alteon this year).

Trying to get an accurate read on Wall Street's reaction to the deal is difficult. Both companies' stock prices went down after the announcement was made -- causing the deal to fall from a value of $7.8 billion to $7.3 billion. But a dip in their stock prices was almost inevitable, given Nasdaq's overall slippage today. At any rate, investors and industry analysts seem optimistic about the acquisition.

"All in all, we believe this is a very positive transaction for Nortel, and we would continue to be aggressive buyers of the stock," stated JP Morgan in an investment notice this morning after the acquisition was announced. So with Nortel and Cisco vying for top billing in the ultrasexy e-business switch arena, what does this mean for Lucent Technologies Inc. (NYSE: LU) and Alcatel SA (NYSE: ALA)? That remains to be seen, but there are still a few potential acquirees in the field. Foundry Networks Inc. (Nasdaq: FDRY) and Riverstone Networks Inc. -- which was recently spun out of Cabletron Systems Inc. (NYSE: CS) -- both offer intelligent load-balancing switch technology. Software-based load balancing vendors, like Resonate Inc., which is scheduled to go public next week, and F5 Networks Inc. (Nasdaq: FFIV) could also be possible targets.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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