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Ascend buys Cascade for $3.7 billion

Ascend Communications has agree to acquire Cascade Communications in $3.7 billion deal.

The shakeout in the networking hardware industry continues. Ascend Communications (ASND) today announced an agreement to acquire Cascade Communications (CSCC) in a stock deal worth about $3.7 billion.

Ascend specializes in industrial-strength remote-access gear primarily for Internet service providers. Cascade Communications, meanwhile, makes wide area network switching technology based on high-speed Frame Relay and Asynchronous Transfer Mode (ATM) pipes for the same market. The duo could offer ISPs a compelling alternative to products from companies such as Cisco Systems.

The announcement comes on the heels of the 3Com purchase of U.S. Robotics for about $6.6 billion in late February. Alameda, California-based Ascend has been rumored to be interested in a merger for some time, with Shiva and Cascade as prime candidates.

Ascend may have something of a merger mess on its hands to clean up. Cascade announced that revenues for its first quarter, which ended March 29, would come in below analysts' expectations. But in the high-growth networking sector everything is relative.

The company is still expected to announce a jump of more than 60 percent in earnings to $90 million on 14 to 15 cents per share. Analysts previously expected the Westford, Massachusetts-based vendor to announce earnings in the area of 22 cents per share. Final results for Cascade will be announced April 10.

The deal calls for Ascend to swap 0.7 shares for every Cascade share. As the market opened today, Ascend's stock promptly dropped more than eight points in heavy trading, raising the stakes of the deal. Analysts also expect a class-action suit from Cascade shareholders in the aftermath of their earnings announcement.

"Strategically, it makes sense," said Craig Johnson, principal analyst with market researcher Current Analysis. "It's been rumored off and on again for some time. The question is, did they announce this at the right time?"

"It should be, if executed correctly, a relative powerhouse in the industry," Johnson said.

The networking hardware market has recently seen wild fluctuations in stock prices on preliminary estimates that earnings may not be up to par due to market softness. Analysts note that many customers seem to be in holding mode as new technologies such as Gigabit-speed Ethernet and IP swtiching continue to evolve from the drawing board to actual products. Cascade bore the brunt of a networking sell-off in late January when its stock fell more than 30 percent in one day.

Under terms of the Ascend agreement, Cascade president and CEO Dan Smith will become executive vice president of Ascend's Core Switching Systems business unit under the direction of current Ascend president and CEO Mory Ejabat.

The last major merger involving networking vendors based in California and Massachusetts involved SynOptics and Wellfleet Communications, which became Bay Networks. The company is still struggling with clashing corporate cultures, the source of many of Bay Networks' problems, according to industry observers.

Cascade's cozy relationship with IBM may need to be addressed by Ascend in the aftermath of the acquisition, as well as Cascade's work with 3Com on an IP switching scheme called Fast IP. IBM is a primary OEM of Cascade's equipment.