Nortel plans to acquire Bay

Angling for a leading role in the Internet-based communications market, telephone equipment vendor Northern Telecom Ltd. announced plans last week to acquire data networking company Bay Networks Inc. in a deal valued at $9.1 billion.

The acquisition should provide more product choices to federal agencies and open the door for Nortel to capture more government business as agencies expand their internal networks and rely more heavily on Internet technology, according to analysts.

Bay Networks will merge with Nortel's Enterprise Data Networks business and will remain a subsidiary of Nortel. Barry Morris, director of Bay Network's federal operations, said it will be business as usual for the company, and there are no plans to merge the companies' federal offices or distribution channels or to lay off employees, he said.

"This is a positioning issue," Morris said. "What company will be better positioned to meet end users' needs and installed base? That will be the vendor who brings end-to-end solutions. I think this will better position us to compete with industry. For the channel partners, this brings more opportunity to the plate."

"As [Internet Protocol] becomes the standard, we saw Bay as having access to fine technology and people, and they fill in some places in our portfolio," a Nortel spokesman said. "In general, it will be easier for users to buy end-to-end IP network solutions."

A Defensive Move

The acquisition is somewhat of a defensive move on the part of Nortel, said Warren Suss, president of Warren H. Suss Associates. "I think it's a reaction to the dramatic shift to IP networking, primarily on the part of carriers. Sprint is buying most of its new gear for its internetworking backbone from Cisco [Systems Inc.] That sent shock waves through the industry."

To stay competitive, carriers need to address the data and IP networking needs of their users, he said. More and more agencies will turn to IP networking as their wide-area networking solution, Suss said. "The biggest recent example of that is the U.S. Postal Service's Managed Network Services, which is the largest IP network in the United States," he said. "I think the significance [of the buy] is [that] Nortel is trying to position itself so it can compete effectively for that business. It may offer federal users more of a choice in the future."

A year ago, no one considered voice-over-IP a threat, but now it threatens the established players, Suss said. To counter this threat, "Nortel decided to buy rather than to build," he said.

Close, but not Perfect

However, benefits from the acquisition may not be immediately evident, said Frank Dzubeck, president of Communications Network Architects, Washington, D.C. "[John] Roth's [Nortel's chief executive officer] philosophy is to do it in one big bite, but it takes some time to chew it," Dzubeck said. "It's a good match, but it's not made in heaven; it's made in purgatory. There is some overlap and differences in culture. I think price is a major issue. I wonder if this will be a burden to Nortel."

While the biggest impact on the federal market likely will be organizational— for example, the merging of the two companies' federal offices in the future— Dzubeck anticipates there will be more product choices for users as well. "When voice and data merge, you may see more products applicable to the federal market," he said.

John Okay, senior vice president of telecommunications and special studies at Federal Sources Inc., said Bay Networks will come out the bigger winner in the federal space as a result of the acquisition. "Nortel has been in the federal market longer, and [it] has more sales experience with federal agencies, whereas Bay has not been around so long," Okay said. "On the other hand, Nortel has a fairly sizable installed base, and it needed a way to modernize its offerings and emphasize the data networking side of communications."

Federal agencies have a growing demand for IP services, Okay said. "This should help Nortel with its new acquisitions and [should] provide better solutions to agencies trying to expand their intranets. In general, it's positive."