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Newbridge tempts Alcatel
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February 18, 2000: 6:06 p.m. ET
Acquisition expected by French telecom equipment maker, at more than $7 billion
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - France's Alcatel SA is likely to announce a more than $7 billion agreement to acquire Canada's Newbridge Networks as early as next week, securities analysts who follow the two companies said.
Newbridge (NN: Research, Estimates) is a telecommunications equipment maker based in Kanata, Ontario, known for its strength in making asynchronous transfer mode (ATM) switches. ATM switches can integrate multiple types of traffic - including voice, video, and data - across telecommunications networks. More than two-thirds of all U.S. Internet traffic flows through an ATM switch at some point.
Analysts said that Newbridge likely would sell for between $40 and $45 per share in a takeover, making the company's value between $7.1 billion and $8 billion. While telecommunications equipment maker Alcatel (ALA: Research, Estimates) is the most likely suitor, analysts said that the London-based communications and IT company Marconi PLC (MNI.L: Research, Estimates) is another possible bidder.
Newbridge, which has announced six earnings warnings in the past 10 quarters, said in November that it had hired investment banker Morgan Stanley Dean Witter to explore strategic options, including a possible sale of the company. At the same time, Newbridge announced plans to eliminate 10 percent of its 6,000-person workforce.
"There are a lot of things that argue Newbridge will be bought, and Alcatel is one of the most likely buyers," said Paul Silverstein, an analyst at Roberston Stephens. "The price is likely to be in the $40 to $45 per share range, and it may be announced at the CeBIT technology trade conference in Hanover, Germany next week."
"Newbridge is very close to doing a deal - there is a high probability it will be announced by the end of the month," said Michael Cristinziano, an analyst at Gerard Klauer Mattison & Co. "There are several possible buyers, but it makes the most sense for Alcatel."
"Newbridge would offer ATM and wireless broadband technology to one of the big European players that needs the technology," said Jim Kedersha, an analyst at SG Cowen Securities. "ATM and broadband wireless are the directions the carrier networks are going, and the European vendors are a little bit behind in those areas."
Newbridge shares closed today at 32-3/4, down 2-5/8. That's about 20 percent below what analysts believe the company would sell for in an acquisition. However, its current price is 66 percent above its level in November, when Newbridge announced that it had hired Morgan Stanley.
Alcatel has expanded its presence in the U.S. market by acquiring five U.S.-based telecommunications equipment and data networking companies over the past 14 months. The most recent of those was its agreement last September to purchase Genesys Telecommunications Laboratories for $1.5 billion. Before that, Alcatel spent a total of $2.8 billion to buy Assured Access Technology, Internet Devices Inc., and Xylan Corp. Alcatel is trying to improve its ability to compete in the U.S. data networking equipment market against market leaders Cisco Systems, Nortel Networks, and Lucent.
Analysts said that Newbridge would be an attractive target because it has a solid customer base of more than 350 of the telecommunications and wireless carriers, about 2,000 experienced networking engineers and designers, and good technology in the areas of ATM switching and broadband wireless. However, Newbridge also has a reputation for being poorly managed.
"Newbridge has been a broken ship for quite some time now," said Robertson Stephens' Silverstein. "Their biggest problem is inept management. Their CEO, Terence Matthews, should have given up the reins a long time ago."
"Newbridge has stumbled because of management's inability to scale the company in everything ranging from manufacturing to product development," said Gerard Klauer Mattison's Cristinziano.
In fact, Alcatel's American depository receipts, or ADRs, slipped 4-3/16, or 8 percent, to 47-3/8 today in response to investors' concerns that the French company could be buying into a problem. Some analysts say that an acquisition of Newbridge would dilute Alcatel's earnings this year.
Alcatel is much larger than Newbridge, with annual revenues of about $20 billion and 120,000 employees around the world. Newbridge announced last November that its revenue for the quarter ended Oct. 31, 1999, rose to $481 million from $457 million in the same period a year earlier. However, its operating income plunged to $5 million from $23.8 million. 
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