Lucent deal combines Net, phone power

The blockbuster $20 billion merger of Lucent Technologies and Ascend Communications, the latest seismic shift to alter the networking industry's competitive landscape, provides significant momentum to the archrival of market giant Cisco Systems.

With the acquisition, Lucent can position itself both as a provider of equipment for traditional telephone companies--its bread-and-butter market--and for Internet service providers. Moreover, the buyout gives the communications behemoth a wider variety of weapons to use in the data networking arena that is driving the industry.

"On day one of this merger, this is the largest broadband networking business in the world by far," said Richard McGinn, chief executive at Lucent, at a press conference today announcing the long-rumored deal.

Every provider of equipment for telecommunications and service provider networks is noting the same trend: A multibillion-dollar opportunity will emerge in the next few years for any company that can provide next-generation networking equipment for existing networks that are being upgraded to handle a more diverse array of traffic, such as Sprint, or "green field" networks being built by a slew of emerging carriers like Qwest Communications.

Companies that can offer iron-clad equipment that can easily fit into existing networks or add competitive advantage to newer layouts could reap huge financial rewards. To that end, corporate size and product diversity will increasingly come into play in this bandwidth gold rush.

In that context, even Cisco--with annual revenue of nearly $9 billion--is starting to look relatively small compared to Lucent or Nortel Networks. 3Com, with about $6 billion in annual revenue, may too feel the pressure to expand its presence or merge with a larger player.

Others, such as Newbridge Networks, Fore Systems, Xylan, and struggling Cabletron Systems, may find their days as independent companies numbered, with huge international communications giants like Ericsson or Siemens ready to pounce.

"Some of the other players may get snapped up pretty quickly," noted Blaik Kirby, senior manager with network consultants Renaissance Worldwide.

Although Lucent's purchase of Ascend is a clear shot across the bow of high-flying Cisco, executives at the company remain unfazed by Lucent's moves. The two combatants are in the midst of litigation pertaining to alleged patent infringement.

"In many ways we view this as a validation that we are on the right track," said Larry Lang, vice president of marketing for Cisco's service provider organization. "We see this as a reaction to our strategy."

Lang said Cisco is having success in customer accounts Ascend promotes, such as the MCI WorldCom network.

Cisco has taken great pains recently to highlight its role in a networking marketplace where the lines between data networks based on Internet standards like the Internet protocol (IP) and older phone networks based on copper circuits are all but obliterated.

"Cisco has got to be rightfully concerned that perhaps they are a lot littler than they thought they were," noted Tom Nolle, president of CIMI Corporation.

Nolle said that Lucent was buying accounts as well as technology. Ascend, he noted, has a large presence in the regional Bell operating companies, or RBOCs--a portion of the telecommunications industry that is expected to be quite busy with equipment purchases in the near term, he said.

Lucent's move may now hasten a more rapid shift in Cisco's strategy, according to Nolle, with the company promoting its switching products for carriers and the so-called Internet backbone over its routers--long Cisco's cash cow.

Lucent's move follows last year's mammoth merger of Canadian telco equipment giant Northern Telecom and data player Bay Networks to form Nortel Networks. That deal served as a warning to all networking companies that were not focused on the inevitable collision of voice and data network schemes.

The Lucent deal, which executives say originated from partnership talks that started in October and ended with the votes of both boards yesterday, is not without its pitfalls. Much like Nortel, Lucent has a reputation for being unwieldy at times given its size, which may not make for an easy integration with Ascend's employees and equipment.

And the ramifications of a merger misstep could be huge. "If they don't manage the acquisition, Cisco wins," noted Maribel Lopez, analyst with Forrester Research.