Lucent, Ascend in $20 billion merger

Telecommunications equipment giant Lucent Technologies announced plans today to merge with high-end data provider Ascend Communications in a deal worth close to $20 billion, making it the largest such deal in the history of the data networking industry.

News of the deal caps a period of intense rumors concerning a merger of the two firms. It catapults Lucent into more direct competition with data kingpin Cisco Systems and allows the firm to offer a wider set of networking equipment to hard-charging Internet service providers and upstart telecommunications carriers.

Under terms of the pact, each share of Ascend stock will be converted to 0.825 shares of Lucent stock. Based on Lucent's closing price yesterday, the deal is worth $19.3 billion, more than doubling the purchase price paid by Northern Telecom for data player Bay Networks last year.

The deal has already been approved by each company's board of directors. It is expected to close during Lucent's third fiscal quarter, which ends June 30, 1999, and will be accounted for as a pooling of interests.

Lucent has been active with acquisitions, gobbling up more than 10 smaller firms over the past two years in order to offer a broader array of databased equipment that builds on its expertise in devices that run telephone networks. But the company has only been able to turn its attention to the likes of Ascend--a company with a current market capitalization of more than $16 billion--once it was finally freed last fall from the regulatory shackles associated with the break from its former parent company AT&T.

Acquiring Ascend marks a significant shift for Lucent because it allows the telco equipment provider to add high-end Internet-based switching devices that are being gobbled up by any carrier or service provider looking to upgrade their network. Ascend specializes in switches based on frame relay and asynchronous transfer mode (ATM) technology. It also is a leader in providing the remote access equipment that providers use to connect dial-up Internet users.

Lucent chief Richard McGinn, who spoke at a Silicon Valley dinner last evening, said the merger with Ascend will give his company the tools it needs to compete as Internet service providers and carriers build out next-generation networks.

Ascend executives said that about 90 percent of its $1.5 billion in annual revenues derives from services providers such as PSINet and UUNet, a division of MCIWorldCom.

"This is the next logical step for us in a constant and swift evolution," McGinn said at a press conference today in New York. "It's a perfect choice. Our companies share the same vision, the same goals, and the same values."

Lucent already announced plans to purchase billing software specialist Kenan Systems on Monday.

The telco equipment provider said it expects the merger to be neutral to earnings through the 1999 fiscal year.

"We believe that no one will have a networking portfolio with the depth, the breadth, and the quality of Lucent and Ascend," said Dan Stanzione, Lucent's chief operating officer.

The company is scheduled to announce results for its fiscal 1999 first quarter next week.

Ascend has previously said it could continue as an independent company, despite larger rivals such as Lucent, Cisco, and what is now called Nortel Networks. But the nearly $20 billion price may have been too good for Ascend to pass up and comes as the company's stock has approached a 52-week high.

Ascend chief Mory Ejabat plans to stay with the company during the transition period.

Ascend will become part of a newly formed broadband networks group, comprised of the company's other data networking technology, optical networking systems, and communications software groups. The new division will be led by Stanzione.

For analysts, news of the deal was a foregone conclusion, since the duo have been linked for some time. "It should really stir up the competitive market," noted Craig Johnson, principal analyst with the Pita Group, a Portland, Oregon-based market watcher.

"This is going to create a lot of additional market stress for all the players," added Tom Nolle, president of networking industry consultants CIMI Corporation.

Brokerage Morgan Stanley Dean Witter today upgraded its recommendation for Lucent to "strong buy" from "outperform." A revised 52-week price target pegs the stock at $130 a share.

Ascend's stock was up almost 8 percent on news of the deal while Lucent fell more than 2 percent in afternoon trading. Lucent's stock has been flying high as of late.