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Nortel buys Bay Networks
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June 15, 1998: 2:05 p.m. ET
Canadian telecom giant pays $9.1B in stock for networking company
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NEW YORK (CNNfn) - Canadian telecommunications giant Northern Telecom Ltd. said Monday it has agreed to acquire Bay Networks Inc. for $9.1 billion in stock.
Under terms of the deal, Bay Networks shareholders will receive 0.6 share of Northern Telecom stock for each Bay Networks share, equal to $38.21 per Bay Networks share.
Bay Networks shareholders will own 21 percent of Northern Telecom after the deal is completed. Bay Networks will operate as a wholly owned subsidiary of Northern Telecom.
Northern Telecom said both companies' boards have approved the deal. The companies expect the merger to be completed in the third quarter.
Northern Telecom also said it expects to issue 134 million new shares under the acquisition deal. The company said it still is calculating how much of a charge it expects to take as a result of the merger.
Northern Telecom's John Roth will remain the company's chief executive officer, while Bay Networks' CEO Dave House will be president.
The deal brings Bay Networks' strengths in Internet Protocol (IP) technology to Northern Telecom's vast telecommunications network.
IP technology allows for advanced data transmission, such as simultaneous voice, data and multimedia transmission, over phone lines.
The companies said they don't expect any layoffs or significant restructuring because there is little overlap in technology between them.
One analyst, however, said some changes will have to be made in the company's product line.
"The only question mark is how [Northern Telecom] will integrate its legacy products," said Aydin Tuncer, Internet and telecommunications analyst at S&P Equity Group.
"Those older products total about 50 percent of their base sales. I think they'll end up taking the older products out of the line and go through some kind of restructuring."
A rumor come true
Rumors that Northern Telecom had designs on Bay Networks had been circulating for months.
Santa Clara, Calif.-based Bay Networks, one of the largest makers of computer networking equipment, had been struggling financially. The company reported a $144 million loss in the third quarter, citing weak demand in its market segments. Analysts had expected the company to turn a profit.
In May, Bay Networks combined its Internet and Telecom Business Group with the Enterprise Business Group in an apparent attempt to make itself more attractive to a potential buyer, even though the company had long denied that it was courting suitors.
"A lot of significant things have changed in the last six months," said Dave House, Bay Networks chief executive officer. "Service providers were increasingly driving to put IP technology in their networks. I was looking for a way to exploit this capability, but I lacked a sales channel as a way to do that."
News of the deal sent Bay Networks (BAY) shares surging more than 12 percent, climbing 3-9/16 to 31-7/8. Northern Telecom (NT) shares, however, plummeted 7-9/16, or more than 12 percent, to 56-1/8 in midday trading.
"A lot of people think integration will be difficult from a cultural perspective, a product-cycle perspective and a location perspective," said Gregory Geiling, an analyst at J.P. Morgan Securities.
"Also, the near-term prospects are dicey. Bay has a history of quarterly earnings volatility. There's no immediate near-term synergy. It's a longer-term strategic merger."
Joining together
The Northern Telecom-Bay Networks deal is the latest in a number of consolidations between telecom and data-networking companies that have been completed in recent months.
Monday's deal helps the newly joined company keep pace with telecom heavyweight Lucent Technologies Inc. -- Northern Telecom's biggest competitor -- and Cisco Systems Inc., the leading computer networking company and Bay Networks' arch rival.
Lucent has been active in tapping into the data-networking equipment market. In April, the company bought Yurie Systems Inc. for $1 billion.
Cisco has been on a buying spree of its own, purchasing telecom equipment maker NetSpeed Inc. in March for $236 million.
"What [this deal] does is solidify Lucent, Cisco and Nortel-Bay Networks as the leaders for the upper echelon in networking," Tuncer of S&P Equity Group said.
J.P. Morgan's Geiling said the landscape will continue to change as more companies combine telecom and data-networking capabilities.
"I'm of the opinion that it's Lucent and Cisco against everyone else," Geiling said. "Just sit tight -- you're going to see a lot more of these mergers in the next three to four months. There are about seven or eight companies that have the opportunity to be major players." 
-- by staff writer John Frederick Moore
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