In a bid to move closer toward an era of multimedia telecommunications over the Internet, networking equipment maker Ascend Communications announced today that it will acquire Stratus Computer for about $822 million in stock.
Ascend will acquire all of the outstanding shares of Stratus in a tax-free stock-for-stock exchange. Under the agreement, each share of Stratus will be exchanged for 0.75 shares of Ascend, based on Ascend's closing price on July 31.
Ascend said it would divest itself of Stratus's non-telecommunications' business before the end of this year.
"I still don't think they needed the whole company," said Steven Frenkel, an analyst at Paragon Capital. "Although they are going to sell off the other divisions, how much are they going to get for them, and who is going to buy them?"
Most analysts agreed that the task of finding buyers may be more difficult than the company expects. There is speculation that a buyer or several buyers already have been found, which Ascend declined to confirm.
"I don't think they are going to get much for those divisions," Frenkel added. "Most likely, they are going to have to eat the losses"
Shares of Ascend barely reacted to the news of the acquisition, while shares of Stratus jumped.
Ascend's stock rose just over 2 percent and was trading at 45.44. The stock closed Friday at 44.47, having traded as high as 55.75 and as low as 22 during the past 52 weeks.
Stratus Computer shares rose nearly 12 percent, to 32.25. The company's stock has traded as high as 60.75 and as low as 21.44 during the past 52 weeks.
Ascend makes communication products used by Internet service providers and telephone carriers. Its products can carry both voice and data over a network, and Ascend hopes to fuse the technologies to offer voice and data across a single pipe.
Stratus makes high-end computers designed to run 24 hours a day and to perform demanding tasks for telephone carriers and other industrial uses. Stratus also makes computers that run Signaling System 7 software, specially designed to intercept and reroute data transmissions.
"The rapid growth of the Internet has increased data traffic and strained the Public Switched Telephone Network, forcing carriers to constantly expand their telecom backbones," Ascend president and CEO Mory Ejabat said in a statement announcing the acquisition. "Our products, combined with Stratus' SS7 switches, OSS software, and fault-tolerant platform, allow network service providers cost-effective, reliable, and transparent means to relieve congestion while reducing operating costs."
Ejabat will remain Ascend's president and chief executive, while Bruce Sachs, Stratus's president and CEO, will become the company's executive vice president and general manager of its carrier signaling and management unit.
Ejabat filed to sell 20,000 Ascend shares on July 30, with a value of slightly more than $1 million, according to Security and Exchange Commission filings. That pending sale represents a small portion of the 1.5 million shares Ejabat holds, according to the company's proxy filed in April.
Ascend will take a one-time charge of about $400 million for the merger in the fourth quarter. The charge will include the costs associated with Stratus's previously announced restructuring, in which it laid off 350 employees.
The two companies expect an additional 150 positions to be eliminated as a result of their combination.
Ascend competitor and networking giant Cisco is said to be moving to acquire Summa Four to gain position similar to that of the newly combined company. In addition, Canada's Northern Telecom agreed in June to buy Bay Networks.
However, some analysts argued that Ascend's stock is highly overvalued.
"To my mind, the only issue is does it make Ascend more, less, or just as attractive to Lucent," said Bert Hochfeld, an analyst at the investment banking firm of Josephthal & Company. "Frankly, from Lucent's point of view, it might be nice to have another product that you are selling to a telco.
He added: "The only reason to own this stock was because of an interest in seeing whether [Ascend] will get sold to Lucent, and I don't think this deal will prevent them from being sold."