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Tech Industry

Networking firms buy to grow

Networking giants such as Bay and Cabletron continue to find that growth is much easier to accomplish through acquisition.

    Networking companies continue to find that growth is much easier to accomplish through acquisition.

    Moves today by billion-dollar players Bay Networks (BAY) and Cabletron Systems (CS) represent the latest evidence that the once-breakneck profit pace of the networking equipment market--buoyed by unquenchable demand and a plethora of new markets--has slowed. Furthermore, it shows that companies are recognizing the need to offer a complete product portfolio so that customers are not forced to mix-and-match technologies from several firms.

    As a result, large companies are looking to take advantage of their well-developed sales channels by adding new product wrinkles culled from acquired start-up technology.

    Behemoth Cisco Systems was the first to master this type of strategy, building a billion-dollar business for its switching gear largely via purchases.

    Cabletron can only hope for similar results with the addition of true routing hardware technology from Yago Systems. The start-up--acquired in a deal today that could total $213 million--specializes in providing traditional switching technology with added hardware that provides routing capabilities in the same box, an emerging convergence of capabilities that will represent more than a $2 billion opportunity by the year 2000, according to market researcher Dataquest.

    Now Cabletron can promote the benefits of its bread-and-butter switches along with high-performance routing features, according to industry observers.

    "They've got the base of accounts to sell into, what they needed was the technology," said Fred McClimans, chief executive of market watcher Current Analysis.

    According to the company president and chief executive Don Reed, the Yago purchase could be just the tip of the iceberg. "We have several acquisitions under consideration at this time," he said, offering further proof that, to rebound, the company will need to acquire.

    "Industry consolidation is not what we're seeing here," noted McClimans. "Here what we are seeing is capitalism at its best."

    Bay's $156 million acquisition of start-up New Oak Communications today offers another example. Executives from those companies said the move gives Bay an advantage in the emerging market for specialized remote access boxes for corporate customers.

    I think it opens new markets for Bay," said Jeff McCarthy, New Oak's president and chief executive.

    It also allows Bay to offer the New Oak technology to a large base of existing enterprise corporate customers as a nifty alternative to traditional remote access devices. It augments the set of remote access chassis for the telecommunications carrier market that Bay already sells.

    In both instances--Bay's and Cabletron's--executives expect profit gains to come from putting a start-ups' technology through the marketing and sales machine of a large organization. Then they cross their fingers before viewing the results.