Alcatel acquires Xylan for $US2B

Alcatel yesterday joined the ranks of several of its telecom equipment manufacturer confreres by announcing plans to acquire networking vendor Xylan for $US2 billion.

Company executives report the move is designed to strengthen its presence in the corporate networking and Internet protocol (IP) markets.

In addition to bolstering its data switching business, Alcatel said the Xylan buyout should strengthen its presence in the managed LAN (local area network) services market and will offer the company a way into the US market for networks that integrate voice and data.

Valuing Xylan at $US37 a share, Alcatel will begin a cash tender offer for the US vendor by March 8. Subject to shareholder and regulatory approvals, the deal is expected to close by early next month, Alcatel officials said. The boards of the directors of both Alcatel and Xylan have approved the deal.

Xylan's Australasian managing director, David Keane, said the merger creates a company worth around $US34 billion.

It's a move he says will silence the critics who claim Xylan should be overlooked in the enterprise because it's too small.

"For the first time, we can tell customers not to buy from a small company like Cisco," Keane said.

The merger strengthens Xylan and Alcatel's presence in the enterprise and carrier markets, he said.

Should the acquisition close successfully, Alcatel plans to reorganise into three separate divisions. There will be one focused on Internet networks and fibre optics, one on communications networks and one on corporate networking. The Internet division will primarily serve the needs of new telecommunications operators rolling out IP-based networks, while the communications networks division will offer products aimed at converging existing voice and data networks for more traditional operators, company officials said yesterday.

Xylan will contribute technology to Alcatel's offerings in the domain of converged voice and data networks for telecom operators, where Xylan already offers some network traffic switching products. However, the division where Xylan will play the largest role will be the new corporate networking unit, which will offer high-speed switching and routing equipment to businesses around the world.

"Xylan is Alcatel in the domain of corporate data networks," said Alcatel's president and general director, Serge Tchuruk. "We went fishing with a line, not a net," he said, in reference to how Alcatel believes Xylan to be a perfect fit into its future strategy. Combining Alcatel's expertise in voice networks, ADSL (asynchronous digital subscriber line) and intelligent networks with Xylan's competencies in enterprise switching and routing will enable Alcatel to offer corporate customers and operators a complete voice/data solution, he said.

Alcatel has been an investor in Xylan and a distributor of its products since 1995, and holds a 5 per cent stake in the company. The two companies have also signed cross-distribution agreements in the past few years and worked together to develop joint products. Sales of Xylan products by Alcatel quadrupled between 1996 and 1998, Alcatel said.

All of Xylan's employees will remain, Tchuruk said. In fact, Alcatel wants to preserve the "startup feel" of Xylan by integrating it into its new divisions, but allowing it to operate almost as an independent company, company officials said. The idea will be to run the Internet and enterprise networking divisions as "virtual companies" within Alcatel where employees are rewarded with stock options and the environment is more like a startup, Alcatel officials said.

Alcatel's acquisition of Xylan comes on the heels of its acquisition of networking startup Packet Engines in October for $US315 million. At the time, Alcatel gave similar reasons for acquiring Packet Engines as it now is for acquiring Xylan -- to get a leg-up in IP networking and to gain an entry into the US data networking market. Looking forward, Alcatel plans more acquisitions to round out its converged data/voice offerings. As early as next week, Alcatel may announce plans for another acquisition, possibly in the remote access market, Tchuruk hinted.

Alcatel hopes to capture 10 per cent of the worldwide enterprise data networking market in three years, company officials said.

The French communications equipment manufacturer's strategy to begin offering data as well as voice network products comes as no surprise, after similar acquisitions have become almost commonplace.

Northern Telecom's acquisition of Bay Networks in June was followed by a $20 billion merger between Lucent Technologies and Ascend Communications in January.

Meanwhile, many analysts expect telecom equipment manufacturers such as Siemens and LM Ericsson Telephone to go on shopping sprees of their own in the data networking arena in coming months.

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