Ascend descends on rumor

The company's stock falls more than 13 percent on renewed speculation that it may soon acquire Stratus Computer.

2 min read
Ascend Communications stock fell more than 13 percent today on renewed rumors that the company may soon acquire Stratus Computer.

Analysts were mixed on whether the deal makes any sense, but investors seemed virtually unanimous in their assessment.

Shares of Ascend closed at 44.4688, down 7.0312 from a previous close of 51.5. The stock has traded as high as 55.75 and as low as 22 during the past 52 weeks.

Stratus Computer was up slightly more than 3 percent on the rumors, at 28.875. The company's stock has traded as high as 60.75 and as low as 21.44 during the past 52 weeks.

Both companies declined comment on any possible buyout. Industry sources told Reuters that the companies were talking about a deal.

In mid-July, Ascend beat analysts' expectations for the quarter by a single cent. It was the third consecutive quarter that Ascend has eked out profits just above Street estimates.

Investors may be shying away from Ascend because its merger with Cascade Communications has dragged down its earnings, a buyout from which Ascend has only just begun to show signs of recovery. Stratus Computer, valued at more than $805 million, could hit Ascend's earnings again.

"I don't think it makes economic sense for Ascend to buy Stratus," said Steven Frenkel, an analyst at investment banking firm Paragon Capital. "It is like buying a farm to get a haystack. I'm not the only one who thinks that--Ascend is down pretty bad."

Frenkel added that Stratus's sales are flat and that the company is not making any money. "I just don't think their sales forces are complementary," Frenkel added. "I think it is a misuse of Ascend's capital."

Other analysts, however, see the buyout as a short-term negative, but a smart move for the long term.

"In the last [analysts'] conference call, Ascend made a big point that they wanted to integrate the traditional public switching system telephone network with IP (Internet protocol) networking," said Phil Leigh, an analyst at investment banking firm Raymond James. "This will help them move into this new telecommunications era of multimedia telecommunications over a network."

Ascend's rumored buyout, reported today in the San Jose Mercury News, will probably not stop speculation that the company is a takeover target itself. The most-often mentioned suitor: Lucent Technologies.

"I see the logic in the Lucent-Ascend combination," said Michael Davies, an analyst at Punk, Ziegel. "Lucent is not visible in the frame-relay and ATM sector, while Ascend is a leader there."