Nortel throws down network gauntlet

Bay takeover sparks scramble for converged market

Voice traffic giant Nortel's acquisition of data networking specialist Bay Networks last week came as no surprise to many observers.

Bay has improved its marketing in the last 18 months, and has started to make bigger profits. The merger, however, could trigger more acquisitions of data networking companies by voice traffic equipment makers. Users are calling for tighter convergence between voice and data communications equipment.

Nortel had made it clear that it wanted to buy a network player specialising in data traffic. Telecoms carriers worldwide are increasingly demanding equipment designed for carrying data, as Internet and multi-media traffic grow exponentially.

Nortel's own rival, Lucent, was also believed to be approaching Bay and looking at other networking companies.

User demands are behind the telcos' interest in network companies.

As corporations increasingly blur the boundaries between their voice and data services, telecoms equipment-makers need to buy expertise in data networks.

The largest data networking firms, notably Cisco, have taken an ambitious step in the opposite direction - acquiring voice products.

'Voice networks need to handle data; people who build data networks are moving into the carrier space,' said John Roth, chief executive of Nortel.

'This is a new industry category that needs the attributes of both. IP competency in backbone networks does not exist anywhere,' he added.

The idea of offering a single IP-oriented product range to all types of client seems simple, but Roth admitted a great deal of work was needed to make Bay's pro- ducts robust and scalable enough to meet the needs of telecoms carriers - Nortel's prime buyers. The challenge is to do this as rapidly as possible, Roth said.

Many of Nortel's products are too complex and expensive for all but the largest corporates. Bay, by contrast, sells to many smaller organisations. The Nortel/Bay alliance seems a logical combination, but the deal comes with an extensive product overlap and, on the Bay side, a weak market position. It is this area that could cause the most concern for users.

Both companies have remote access equipment for the enterprise market. Nortel has recently bought Aptis communications, which provided it with the CVX-1800 concentrator, which competes directly with Bay's new Versalar 15000 IP Switch.

The overlap of several product lines has led to some speculation that certain ranges will be axed.

Some analysts are already predicting cuts on the less financially-stable Bay side.

The two companies are keen to play down product overlap problems, but chief executives admitted that one-quarter of Nortel's business now comes from high-end enterprise systems that would also be targeted by Bay.

Research analyst IDC believes it is only a matter of time before Lucent, Ericsson and the other telco equipment manufacturers ann-ounce their own data networking acquisitions. One possible target could be 3Com, with the likely predator being close partner Siemens Nixdorf.

3Com European product marketing manager Nigel Hawthorn did not rule out a merger with a telco equipment vendor - but said the company did not need it.

Hawthorn said 3Com would prefer to continue with its alliances, notably with Siemens and Newbridge Networks.

He said: 'What this deal does do is give a real wake-up signal to the smaller data networking companies such as Cabletron and Shiva' - both have strategic relationships with Nortel.

Cisco is confident it will not be bought by a telco supplier, even though it took the precaution of announcing a shareholder rights plan - a classic defence against a takeover. Instead, it aims to work with partners.

Richard Freemantle, vice president of northern Europe at Cisco, said: 'Cisco has a market capitalisation of $80 billion (#48 billion). It would be unlikely that one of the voice companies could contemplate buying us.'

But some analysts believe their criticisms are just masking talks aimed at making similar deals with other telecoms equipment vendors.

Some Bay rivals claim merger is not the best route into the converged voice-and-data market. Freemantle said: 'Big acquisitions are so risky that its hard to point to any that have worked.'

The market size of the merged company will give Bay significantly more standing, creating an international player with revenues of over $15 billion - dwarfing even Cisco.

For all the possible difficulties, the acquisition will force other players to adapt. By grasping the IP space, Nortel has taken the high ground. Its voice rivals, such as Lucent and Cisco, will now need to react.

Both have been keen to move into voice-data systems, but have bought nothing on the scale of Bay.

Bay Networks Small is beautiful

Society of IT managers secretary Bob Dunn, who bought the 155Mbps asynchronous transfer mode (ATM) kit from Bay when he was IT head at Cardiff County Council, said he would be sorry to see Bay Networks go. Dunn said: 'They were very good at what they did. We had no problem with what they recommended during that project, or the service they gave us. They were good because they were small enough to react to what we wanted, and I hope they don't lose that when they are part of a bigger company'

? Additional reporting by VNU Newswire