Network vendors order out

That seems to be modus operandi relied on by an increasing number of networking companies in a market where vendors are under pressure to account for a broader range of technologies in a single portfolio of products. Rather than organizing a new development effort, companies are opting to buy buy entire companies and take the subsequent financial hit.

This pressure is evidenced in a recent series of acquisitions by networking giants 3Com (COMS) and Cabletron Systems (CS) and capped today by Lucent Technologies (LU). All three--including Lucent which was just spun off from AT&T a few weeks ago in one of the nation's largest stock distributions--have swallowed up smaller companies that help them to expand their product lines.

Lucent Technologies today announced plans to acquire Agile Networks to boost its networking portfolio with Agile's "virtual LAN" software. Virtual LANs are promised to help companies extend the size or scope of their networks with minimal extra work or cost, said Carl Pavarini, Lucent's vice president of multimedia systems. Lucent sells public and private networks hardware and software, consumer phones, and electronics components.

Financial terms of the deal were not disclosed. Under the arrangement, Agile will be a subsidiary of Lucent under Agile's chief executive, William Seifert.

3Com has also been shopping around lately, announcing yesterday that it plans to buy OnStream Networks for $245 million. OnStream offers 3Com increased penetration into the network services and Internet service provider markets, as well as the growing general market for Asynchronous Transfer Mode (ATM) in the network backbone.

OnStream will become the broadband access division of 3Com's wide area network operations headed by OnStream President James Mongiello. The OnStream acquisition is expected to close November 30.

Both companies appear to be following the strategic example of Cisco Systems, which may have set the standard earlier in the year with its $4 billion acquisition of StrataCom. The acquisition gave the networking monolith an immediate and formidable market presence in the carrier markets for frame relay and ATM technology. They followed that by plucking start-up Granite Systems in September for $220 million to establish a foothold in the Gigabit Ethernet market--this despite the fact that Granite does not currently have any products.

Similarly, Cabletron added frame relay remote access capabilities via its recent acquisition of NetLink for $160 million and the $120 million May acquisition of Network Express, a remote access vendor specializing in ISDN high-speed phone lines.

And the cycle is likely to continue. With the deals such as these making Cisco and Cabletron bigger and more powerful, smaller companies will feel only more pressure to expand their product lines through acquisition in the future, despite short-term harm to quarterly earnings.