Nortel's Alteon buy highlights Web-hosting aspirations

In a long-rumored deal, telecommunications equipment giant Nortel Networks dipped into its coffers to strike a nearly $8 billion deal for Internet switch-maker Alteon WebSystems today, underscoring the need for large networking companies to have sophisticated technology for managing Web site traffic. Rival Lucent Technologies is also thought to be in the hunt for similar technology.

Nortel's need for such technology was a foregone conclusion in the aftermath of Cisco Systems' purchase of ArrowPoint Communications in May for about $6 billion. Both ArrowPoint and Alteon make switching devices that can sit in front of Web server systems and direct queries to those systems so that no one computer gets overloaded with requests for information. Others in the market include F5 Networks and Foundry Networks.

This new breed of equipment providers feeds into an ongoing trend toward specialized network equipment that can handle a specific task, such as Web site traffic flows, according to analysts.

"Nortel's trying to stay current," said John Armstrong, chief network analyst for Gartner-Dataquest.

Under terms of the deal, Alteon shareholders will receive 1.83148 shares in Nortel Networks. Based on Nortel's closing price yesterday of $78.625, the deal values Alteon's stock at $144 per share. The acquisition is expected to be neutral to Nortel earnings in calendar year 2000 and slightly accretive in 2001, according to the company.

The deal is expected to close in the fourth quarter of 2000.

Alteon held a 39.8 percent share of the market for "layer 4-7" Web switches in the first quarter of this year, followed by Cisco with 22.5 percent, foundry Networks with 19.8 percent, and ArrowPoint Communications, now part of Cisco, with 17.8 percent, according to industry researchers Dell'Oro Group.

The so-called content switching-device market is expected to grow from $203 million last year to $4 billion by 2004, according to International Data Corp.

Nortel executives said the move completes a technology strategy targeted at corporate-computer data centers and third-party Web-hosting facilities, like those run by the likes of Exodus Communications and Global Crossing's GlobalCenter. Alteon can be used in such centers, serving as a front-end manager for traffic, they said.

The company has been analyzing various technologies from companies in the Web-switching market for some time, according to Bill Connor, president of enterprise solutions at Nortel, including ArrowPoint before it was acquired by rival Cisco. "We were obviously looking at all of them," Connor said.

News of the deal follows a blowout quarter for Alteon. The company posted earnings of $7.4 million, or 16 cents per share, on record sales of $51.5 million. Consensus estimates compiled by First Call/Thomson Financial predicted a profit of 3 cents per share for the company.

Nortel announced another strong quarter earlier this week on the strength of optical-networking equipment sales, but its stock has faltered since, trading in the mid- to low $70s.