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Alcatel buys Newbridge in $7.1 billion deal

The French phone equipment maker acquires struggling Canadian networking firm Newbridge Networks.

French phone equipment maker Alcatel today announced that it has acquired struggling Canadian networking firm Newbridge Networks in a deal worth $7.1 billion.

Under the terms of the merger, agreed to by both companies' boards, Newbridge shareholders will get 0.81 of an Alcatel American Depositary share for each of their own shares. The deal values Newbridge shares at $39, based on Alcatel's ADS closing price of $48.125.

To finance the deal, Alcatel financial director Jean-Pierre Hallbron said the company would issue new shares equivalent to 17.6 percent of its current capital, according to Reuters. The deal is expected to be completed by the end of June.

Last night, after-hours trading for both the companies' stocks was halted on anticipation of the deal. After delaying its quarterly earnings announcement yesterday, Newbridge today reported a profit of 13 cents per share, beating Wall Street analysts predictions by two cents.

The acquisition, rumored for the past week, allows Alcatel to better compete against Cisco Systems, Nortel Networks and Lucent Technologies by enabling it to offer a wider array of networking equipment to telecommunications carriers and Internet service providers.

It also caps off a two-year buying spree by Alcatel, which earlier spent $7 billion to buy five U.S.-based networking companies in its quest to make inroads into the lucrative North American market.

"This acquisition...would underscore Alcatel's determination to play catch-up to Cisco, Nortel and Lucent," said analyst Benn Mikula of RBC Dominion Securities. "But the single best question is how Alcatel will digest all the acquisitions. Alcatel has to build a corporate culture in the U.S."

Newbridge is developing a set of high-end Internet-based equipment that combines voice and data traffic--technology that Alcatel doesn't have. Newbridge is also a leader in asynchronous transfer mode (ATM) technology, which sends voice and data signals over networks at high speeds.

Looking forward
In a conference call with analysts today, Alcatel executives said Newbridge will be merged with Alcatel's carrier data division to form new division within Alcatel called carrier internetworking. Pearse Flynn, Newbridge's president and chief operating officer, will serve as president of the new division, which will be based in Kanata, Canada.

Alcatel and Newbridge executives said the new division will have a combined yearly revenue of $2.5 billion and they expect revenue to double in the years ahead.

Terence Matthews "This is an incredible fit. Where Newbridge is strong, Alcatel is not. Where Alcatel is strong, Newbridge is not," said Newbridge chairman and chief executive Terence Matthews, who will not join Alcatel. "The deep pockets that Alcatel brings can take what we have and make it a worldwide winner."

The purchase is the latest merger between telephone equipment makers and network equipment makers, who are all racing to build new technology that merges voice and data on a single Internet-based network. To develop the new technology, Lucent last year bought data networking firm Ascend Communications for about $24 billion, while Nortel purchased networking firm Bay Networks in 1998 for $6.7 billion.

Since then, analysts have speculated that the remaining unattached phone equipment makers, such as Alcatel, Ericsson, Nokia and Siemens, would be interested in purchasing either 3Com, Cabletron or Newbridge Networks for their data networking equipment.

3Com, however, has remained independent, while Cabletron plans to split into four separate companies.

The buyout ends speculation about Newbridge's future. The once fast-growing networking firm has struggled financially the past few years. The company has discussed a takeover with several companies the last few months, sources say. Published reports have speculated that Siemens and Ericsson have expressed interest.

Newbridge has been beset by a wave of recent executive turnover and seven profit warnings in the last three years. Company executives in mid-November said the company would be open to a takeover after it announced a restructuring that included cutting about 700 employees, or 10 percent of the workforce, and said it planned to outsource its manufacturing and customer service operations to cut costs.

But Newbridge today reported a strong third quarter. Excluding one-time charges, the company earned $33.9 million (U.S. $23.15 million), or 19 cents a share, in Canadian dollars, compared with $46.9 million (U.S. $32.03 million), or 26 cents a share during the same quarter last year.

In U.S. dollars, the company earned 13 cents a share, two cents more than a consensus of analysts had expected, according to First Call.

Third-quarter revenue grew about 16 percent, from $450.7 million (U.S. $307.81 million) to $520.6 million (U.S. $355.55 million), in Canadian dollars.

Alcatel has invested heavily the past two years to enter the North American market. The company has spent about $7 billion to acquire five U.S.-based networking companies, including Xylan, Packet Engines and Internet Devices. The company also recently created a $150 million investment fund to enable it to take stakes in U.S.-based start-ups.

Alcatel chief technology officer Martin De Prycker said Newbridge will allow the company to better compete in North America.

"In North America, Newbridge has some strong customers," De Prycker said. "Compared with Lucent, Cisco, Nortel's customer base, we feel we have a comparable customer base. Newbridge has strong products that can fill all the holes we have in the data space."

In particular, De Prycker touts a new high-end network switch developed by Newbridge as a potential market leader.

The switch is geared to help telecommunications carriers and Internet service providers build faster networks. Previously, Newbridge was a market leader with a device that runs at 12 gigabits per second (Gbps), but in recent years, Newbridge's technology has been surpassed by Cisco, Nortel and others. Newbridge's new device has the capacity to send traffic at 50 gigabits per second.

"We believe the 50 gigabit switch will strongly lead in the space," he said.

De Prycker also said the Alcatel's new carrier division will tackle the emerging wireless high-speed Internet access market by combining Newbridge's technology with products that Alcatel has developed.

"The key objective is to make sure we take a competitive position in broadband wireless," he said.