June 19, 1997 1:00 PM PDT

Bay nabs Gigabit Ethernet maker

The worst-kept secret in the networking industry was finally announced today as Bay Networks (BAY) nabbed Rapid City Communications for $155 million in stock, one of several start-ups working on next-generation Gigabit Ethernet technology.

The acquisition is one of the first this summer, but there could be more to come as start-ups vie for precious merger sweets from established networking players.

Bay said products from the acquisition will hit the streets by the fourth quarter, a time frame in line with a company strategy unveiled in May that indicated gigabit-speed gear debuting by the first quarter of next year.

The acquisition of a start-up well on its way toward an actual product will certainly speed Bay's gigabit plans to fruition. Until now, analysts have noted that they have seen little movement from Bay in the gigabit arena, while competitors such as 3Com have already detailed plans to its customers.

"Bay is taking a critical step forward in addressing high-speed networking needs," said David House, chairman, CEO, and president of the Santa Clara, California-based company.

The long-anticipated Rapid City acquisition could be the start of a busy summer for large networking companies as they seek to fill holes in their Gigabit Ethernet strategy through acquisition of one or more of the numerous young companies in the space. A hot rumor circulating through the industry is that Extreme Networks could be plucked by 3Com. Cabletron systems is another likely candidate to spend some cash to round out its product line.

Though nascent, the gigabit-speed industry is expected to experience rapid consolidation; there are too many start-ups in the market in the eyes of most analysts, and customers generally do not want to rely on a marginal company for their networking gear.

Gigabit Ethernet represents the next-generation of Ethernet technology, the dominant networking pipe that connects PCs to networking gear in a local area network. A standard governing gigabit speed for the technology is on track to be finalized early next year, but that has not stopped a plethora of start-ups from emerging with product plans early to draw the attention of users in what is expected to be a fast-growing marketplace.

Market research from a number of industry analysts indicates that the Gigabit Ethernet market could add more than $1 billion to the networking sector by the year 2000.

"Bay was clearly looking for a modular, chassis-based solution," said Esmerelda Silva, analyst with market researcher International Data Corporation. "They needed a product in the network center. This is a very strategic piece."

Bay said the acquisition of Rapid City will speed shipment of the f1200, an eight-slot switching chassis with support for a maximum 96 autosensing 10/100-mbps Ethernet ports, 48 Fast Ethernet over fiber ports, or 12 1,000-mbps ports. The switching product with routing ability, which Rapid City had previously planned to ship this month, will also be integrated with Bay's Optivity network element management software.

The f1200 is one of three initial products Rapid City was planning to ship prior to the acquisition. Other models, such as the f400 and f600 Ethernet switches, will be evaluated in the coming weeks to see if they fit into the Bay product line, according to Joe Kennedy, former CEO of Rapid City. "I think they'll all go somewhere," he said.

Upcoming Bay features, such as the AutoLearn function that can automatically configure a switch for an established network, will be built into the f1200 release. Bay officials also said integration of the Bay Route Switch Processor (RSP) can also be expected in the future. That chip is intended for networks that are looking to add routing capabilities to IP-based switches.

House said the decision about which gigabit start-up to purchase had been ongoing for the past three quarters. The company brought gear from several unspecified vendors into Bay's test labs.

Bay will issue $155 million in stock to all Rapid City shareholders. The acquisition is a relative bargain compared to another networking giant Cisco Systems' first dip into gigabit technology. Cisco bought Granite Systems, a maker of switching processors for Gigabit Ethernet, for $220 million in September of last year.

"This wasn't a surprise--that would be the going rate," Silva said of Rapid City's price. "The potential for Rapid, over the long term, to do business in enterprises was not great. Customers are not going to bank their backbone on a start-up. They would have the opportunity to sell their solution initially before the large vendors got their stuff out."

Rapid City initially said product would roll out the door this month. "Certainly, I would have expected them to release product sooner than the end of the year," said Silva, noting the revised launch date included in Bay's announcement.

Rapid City's more than 50 employees will be integrated into Bay's enterprise business group with Kennedy serving as a Bay vice president. Bay officials said they expected the deal to close this fiscal quarter, with the company taking a charge of about 70 cents per share for the acquisition, based on Bay's current price.

 

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