Lucent Inks $20B Ascend Deal
Lucent Technologies made it official Wednesday, agreeing to buy Ascend Communications for $20 billion in a deal that could give the pair an edge on chief rival Cisco Systems in the hotly contested Internet-based networking equipment sector.
Under the agreement, each share of Ascend will be converted into 0.825 shares of Lucent (LU), ascribing a higher-than-expected value of about $89 to each Ascend share (ASND), based on Tuesday's closing prices. It represents a 19 percent premium.
Lucent said the deal won't dilute profits this year and will add to earnings in 2000, the first full year of combined operation.
Following news of the pact, slated to close by June 30, Ascend shares edged up 7/16 to 75 3/8 in Wednesday morning trading. Lucent, the world's largest maker of telecom equipment, tumbled 9 1/2 to 98 3/8.
Taking into account the decline in Lucent stock, the deal would be worth about $17.4 billion, or $80 a share.
The long-rumored deal, first reported Monday, would combine the expertise of Lucent in traditional phone networks with Ascend's expertise in equipment used to link computers. With data fast becoming the main form of traffic over phone lines - supplanting voice - industry analysts expect a convergence of the two kinds of networks.
That leaves traditional equipment makers such as Lucent and Nortel Networks (NT) moving to offer products based on so-called Internet protocol, a superior digital-based form of transferring information. Networks based on that standard can carry far more traffic and handle it more efficiently than conventional circuit-based phone lines.
Data networkers such as industry leader Cisco (CSCO), meanwhile, have been expanding to handle the needs of customers who still partly rely on traditional circuit-based systems and eventually plan to switch over. They're primarily focused, however, on building a lead in fledgling IP-based networks.
The goal: to become the main, if not sole, provider of a client's networking needs.
The acquisition of Alameda, Calif.-based Ascend, a strong competitor to Cisco, could give Lucent a leg up. Highly regarded Ascend, the fourth-largest maker of data equipment, produces several industry-leading switches and routers based on digital "packet-switching" standards known as frame relay and ATM.
"They are one of the few companies that have this technology," said Peter T. Lieu, networking analyst at Needham & Co.
Added Mike Cristinziano of Gerard Klauer Mattison: "You put them together and they could become a more formidable competitor to Cisco."
The Ascend deal, meanwhile, could trigger another blast of mergers in the rapidly changing equipment industry.
Although most analysts view the two companies as terrific fits from a technical standpoint - they have few overlapping but many complementary products - some question the price of the deal and the extent to which the corporate cultures could clash.
Lucent, which has made 11 ata-related acquisitions in the last two years, has been known to pay steep prices for desired targets, and that appears to be the case here. With such a high stock value, however, the equipment maker can afford to overpay.
The differences in corporate cultures, often an overlooked obstacle in how well mergers succeed, is another concern. East Coast-based Lucent, a former AT&T (T) subsidiary, is an older, more traditional company in Murray Hill, N.J., while California-based Ascend is a young, more free-wheeling organization.
Some analysts suggested Lucent would be better off letting Ascend do its thing, but the company instead plans to incorporate Ascend into a new broadband division, to be headed by Dan Stanzione, Lucent's chief operating officer. Stanzione also runs the famed Bell Labs research unit.
The key now is how quickly Lucent can incorporate Ascend into the new broadband unit - in such a time-sensitive industry they cannot afford to fall behind Cisco - and whether it can retain the services of top Ascent personnel responsible for the creation of the company's best products.
The Ascend acquisition, while huge, is not the only significant deal Lucent struck this week. On Monday, it announced that it will buy privately held Kenan Systems for a pricey $1.48 billion in stock. Kenan makes software that controls billing and customer care for data networks.
Written By Emily Church and Jeffry Bartash, CBS MarketWatch