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Nortel leaps into Net services with acquisition

The giant telecom equipment maker takes a big step into the market for local Internet services with its acquisition of Sonoma Systems for $540 million.

Giant telecom equipment maker Nortel Networks took a big step into the market for local Internet services today, announcing the acquisition of Sonoma Systems for $540 million in newly issued Nortel stock.

Sonoma specializes in delivering high-speed local Internet access, video services and Internet Protocol (IP) telephony over a single connection.

Gartner analyst Jay Pultz says Nortel's acquisition of Sonoma Systems rounds out its product line and should help the Canadian network-equipment supplier gain a bigger share of the market for small and midsize operations.

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Nortel saw its revenues for local Internet services increase 80 percent in its second quarter 2000 from the same period a year earlier, and when the results were announced last month, Nortel CEO John Roth said the company continued to "experience tremendous demand" for those services worldwide. Nortel said the acquisition of Sonoma is intended to help meet that demand.

Combining Sonoma's services with Nortel's optical, DSL and asynchronous transfer mode (ATM) services "will dramatically change the cost of a voice call," predicted Steve Schilling, president of Nortel's Access Networks.

Nortel already has begun integrating its high-speed network-access platform with Sonoma's integrated (ATM) voice and data access devices following an agreement struck in May. Nortel at that time acquired the right to take an equity stake in Sonoma.

Nortel will have to contend with a "flood" of competing services, predicted Current Analysis analyst Ron Westfall. Still, he said "Nortel possesses the channels and portfolio depth to parlay the Sonoma acquisition into a long-term successful relationship."

The purchase will mean issuing about 6.9 million shares of Nortel stock, Nortel said, and the deal is expected to close in the fourth quarter subject to regulatory and Sonoma shareholder approval. Nortel said the acquisition should be neutral for calendar year 2000.

Of the $540 million in stock, Nortel said $60 million is contingent on Sonoma meeting certain business objectives in the year after closing. "We must meet a certain threshold" of sales to Nortel's major carrier clients," Sonoma CEO Gregory Koss said.

Nortel said Koss will continue Sonoma's work under the direction of Schilling. Sonoma's approximately 125 employees will work for Nortel, and a Nortel spokesman said that for now, the company has no plans for layoffs. Nortel has more than 80,000 employees.