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Lucent to buy Chromatis?
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May 30, 2000: 1:43 p.m. ET
Leading phone equipment maker could announce latest acquisition Wednesday
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - Lucent Technologies Inc. could announce a multibillion-dollar acquisition of Chromatis Networks Inc. as soon as Wednesday, a source close to the Lucent said.
Although the deal is not yet finalized, Lucent, the world's largest telecommunications equipment maker, is expected to purchase Chromatis for between $5 billion to $5.5 billion in stock, the source indicated. Reuters first reported last Friday the two companies were mulling a $5.7 billion deal.
However, the source warned the deal could still fall apart. In early afternoon trading, news of the deal sent Lucent (LU: Research, Estimates) shares up 5/8 to 56-3/8.
Herndon, Va.-based Chromatis makes optical networking equipment. Its chief product, Metropolis, speeds multi-service traffic -- such as voice, data and video -- onto optical wavelengths across optical networks in cities.
Analysts said the deal will help boost Lucent's position in optical networking against rival Nortel Networks Corp. (NT: Research, Estimates), currently the market leader in that category.
"It's a capability that Nortel doesn't have today," said analyst Paul Sagawa, of Bernstein. "If the deal happens, Lucent will have more complete metropolitan solutions."
Chromatis and Lucent officials both declined to comment on reports of the deal.
Metropolis' 'one-box' answer
Chromatis introduced Metropolis last March. Metropolis consolidates various network elements --such as Internet protocol and SONET, a fiber-optic transmission system for high-speed digital traffic -- that are normally housed separately on a network.
 Current metro area networks operate on existing SONET networks that are designed for voice traffic only. The Metropolis product is designed to save space and helps speed traffic on networks, letting communications providers use the device to quickly and cheaply introduce new services, said Chromatis spokesman Geff Kuck.
"Now we have voice and data traffic and the networks can't handle the exploding growth," Kuck said. "Metropolis makes networks more efficient."
The ability to offer such products is becoming increasingly important, analysts said.
For the current calendar year 2000, optical products will generate about $10 billion in revenue for Nortel, according to analyst Michael Neiberg of Chase H&Q. Lucent will produce about $6 billion is sales while Cisco Systems will be a distant third, he said.
"Their capital base are the enterprise accounts that are much smaller than Nortel and Lucent," Neiberg said of Cisco.
Qwest Communications, the broadband Internet communications company, is currently testing the Metropolis product.
The race for optical
The Chromatis deal would be the latest step by Lucent to develop a high-speed optical network able to handle voice, data and video transmissions against rivals Nortel and Cisco.
Neiberg said the pace of change in optical networks and customer demands are fueling the acquisition pace.
"Technology in optical networking space is moving incredibly quickly," he said, adding that large companies like Cisco are buying smaller technology companies to meet customers' demands.
"As part of the evolutionary process, we will continue to see acquisitions to as a way to satisfy customer needs," Neiberg said.
Cisco Systems Inc. (CSCO: Research, Estimates) has made three such acquisitions within the last 10 months, acquiring Qeyton Systems, a privately held Swedish company, ArrowPoint Communications Inc., a maker of Internet switches to speed transactions on the Web, and Cerent, a maker of boxes that allow data and voice to switch quickly between copper lines and fiber-optic cables for a combined $13.4 billion.
Brampton, Ont.-based Nortel spent $1.43 billion to purchase optical component maker CoreTek last month. CoreTek components use tiny, movable mirrors to alter the wavelength of light emitted by semiconductor lasers, allowing networks to monitor and reroute traffic.
In early afternoon trading, shares for Nortel were up 1-1/2 to 53-1/4 while Cisco were rising 2-1/2 to 57-7/16. 
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