Nortel Snaps Up Alteon for Net Switching Gear

FRAMINGHAM (07/31/2000) - Nortel Networks Corp. last week announced plans to buy Web switching market leader Alteon WebSystems Inc. for stock valued at $7.2 billion, a move Nortel says could help customers build networks better able to handle exploding Internet traffic.

The deal was valued at $7.8 billion when it was announced on Friday morning.

After late-day trading and a $5.875 decline in Nortel stock, the deal is now worth about $7.2 billion.

Observers reacted positively to Nortel's plans to combine Alteon's switches, which enable Web sites to deliver content more quickly, with Nortel's optical network products and other gear. The combination of these technologies, Nortel says, will support a new generation of Internet data centers capable of delivering content more efficiently at high speeds.

"On the service provider side, it will allow the kind of integration required to combine all the pieces to create the intelligent Internet infrastructure for end-to-end quality of service," says Ron Westfall, an analyst at Current Analysis Inc. in Sterling, Va. Enterprise customers won't be directly affected as much, but Nortel will now be able to supply them with Web switches, a strategic enterprise network component the vendor previously lacked, he says.

"The acquisition gives Nortel an entry in the ISP/ASP market, which traditionally has not been one of their strengths," says Greg Collins, director of Dell'Oro Group. "Nortel can now offer content-aware infrastructure components in addition to their Passport series of switches, and they are now reselling Juniper's WAN routers."

Alteon's ISP and ASP customers won't see much change in the short term, Collins says. But down the road they should keep a wary eye because some of Nortel's acquirees get lost in the sauce. "In the long term, they need to be concerned that what happened to Bay Networks, does not happen to Alteon," Collins says.

Nortel bought Bay two years ago for between $7 billion and $9 billion in an effort to transform itself into an IP company, but little has come from the acquisition to date.

Phil Kwan, associate director of network infrastructure at Incyte Genomics Inc. in Palo Alto, Calif., says as a Nortel customer, the acquisition won't affect his buying decisions - for now. But, he says, the fact that Nortel will now incorporate Alteon's Web switches into its product line might give him good reason to look at Alteon switches six to eight months down the road.

Incyte Genomics currently uses Foundry Networks Inc.'s Web switches.

Nortel has a history of buying technology companies and making their products more reliable, according to Kwan. He also thinks Nortel puts its products through many more levels of quality assurance before releasing them, while some companies prefer to push new features out fast and then send patches to users willing to sacrifice reliability for performance.

Incyte uses Gigabit Layer 2 and Layer 3 switches from Nortel that were originally from a company called Rapid City. Kwan says he always liked Rapid City's products but liked them even better after Nortel bought the start-up.

"Nortel improved the reliability and robustness of the technology. So if Nortel were to buy [Alteon] out, they would probably make [Alteon's products] more mainstream," he says.

John Ferguson, director of production services at VeriSign Inc., says the acquisition should benefit enterprise customers.

VeriSign has been looking at technology from Alteon designed to offload security functions from Web servers onto devices that speed e-commerce transactions. VeriSign, a Mountain View, Calif., Internet security services provider, would like to use that technology to speed customer downloads that take up massive amounts of valuable Web server CPU power.

Ferguson says he would expect a company such as Nortel could deliver better service and support than a smaller company such as Alteon. Nortel's bigger financial and personnel resources could also mean more investment in Alteon product development, he says.

What Alteon brings to the table is a group of people focused on development of products that have traditionally been at the front of their class, he says.

While the Alteon acquisition fills a gap in Nortel's product line, it is also a response to Cisco Systems Inc.'s purchase of ArrowPoint Communications Inc. earlier this year for $5.7 billion. Vendors are jockeying for position in this nascent market to become leading suppliers of equipment to service providers offering Web-hosting services and Internet data centers, among others.

"This is all about time-tomarket and speed," says Nortel Chief Operating Officer Clarence Chandran.

Nortel plans to integrate Alteon's content-aware switching technology with Nortel's storage products, Gigabit switches, professional services, hosted application management/delivery and caching offerings. Nortel will also integrate the technology with its third-generation wireless offerings.

International Data Corp., a market research firm in Framingham, Mass., forecasts the Web switching market to increase to more than $4 billion by 2004 from $203 million in 1999. Alteon owns half of the overall Layer 4 to Layer 7 Web switching market and an 81% share of the Layer 4 to Layer 7 Gigabit Ethernet switch market, according to Dell'Oro Group of Portola Valley, Calif.

Alteon posted revenue of $51.5 million for the quarter ending June 30, an increase of 82% from the previous quarter.

During an interview with reporters last Friday, Nortel was put on the defensive for the price it paid for Alteon, which is double what analysts say global Layer 4 to Layer 7 switch market will probably be worth in four years.

"What we saw here was a tremendous value for the two companies coming together," Chandran says.

Alteon CEO Dominic Orr pointed out that his company's revenue has been rising about 70% quarter-over-quarter for the past year.

"The going price for high-end infrastructure companies has clearly gone up into the $10 billion range over the last few months," Current Analysis' Westfall says. "Alteon is already a proven player."

The amount Nortel is paying for Alteon is about equal to what the company paid for Bay two years ago, even though in terms of revenue Bay was five times Alteon's current size. The initial value of Nortel's Bay buyout was $9.1 billion, but the subsequent drop in Nortel's stock price lowered it to about $7 billion by the time the deal was completed.

Alteon's customers include Yahoo Inc., Excite@Home Inc., Inc., NTT DoCoMo Inc., DLJDirect Inc., CitySearch-Ticketmaster Online, Exodus Communications Inc. and Loudcloud Inc., among others.

Upon completion of the transaction, Alteon will become a wholly-owned subsidiary of Nortel.

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