Ascend, Cascade to merge

Electronic News, April 7, 1997 by Sarah Cohen

Most industry observers agree that the catalyst spurring the networking consolidation trend is the market itself, as Internet service providers (ISPs) seek fast and convenient ways to differentiate themselves from one another, and network equipment providers seek fast and convenient ways to provide ISPs with end-to-end products.

Kevin Outcalt, director of service provider marketing for Cisco, commented, "The networking consolidation trend is due to recognition of the fact that service providers are looking for end-to-end solutions that offer faster integration into their systems than in the past. And ISPs these days are realizing that they must differentiate themselves in terms of service rather than speed and bandwidth."

Ascend's Bernie Schneider, VP of strategic business development, believes there's another reason for the consolidation trend: Mr. Schneider said that for a networking business, which receives much of its income from phone companies, there's a need for a large support organization. "As the telcos and ISPs become very big, so do the networking companies," stated Mr. Schneider.

In last week's telecommunications merger news, the $16.5 billion merger between SBC Communications and Pacific Telesis Group was completed, shareholders approved the merger between British Telecom and MCI Communications and there were reports that Nynex and Bell Atlantic will side-step many regulatory approval procedures and soon complete their merger.

No Correlation

Some industry analysts do not believe there's a direct correlation between the size of telephone companies and the size of network equipment providers. Paul Johnson, senior technical analyst for Robertson Stephens and Co., said, "The telco mergers are somewhat unrelated to the networking mergers, although both industries have been experiencing a weak quarter."

In fact, Cascade last week announced that it expects revenues and earnings below analysts' expectations for 1Q97, despite an expected 61 percent revenue hike, to $90 million from $56 million. And Fore Systems, a company that some believe is a very likely candidate for a merger because of its leadership in asynchronous transfer mode (ATM) technology, also reported disappointing financial results despite a 35 percent increase over last year's 4Q96 revenue of $75.3 million.

Eric Cooper, CEO of Fore, stated, "The overall rate of growth in the networking industry appears to have slowed, and our fourth-quarter results were affected by several factors, including increased competition in the switched networking segment of the market, longer sales cycles for the larger deals for which we now compete and slower sales growth in international markets."

Ascend's Mr. Schneider called Cascade's financial performance "a near-term thing. It's what frame relay went through five years ago. You have to wait for people building their networks to build their pipes up."

Despite a potentially difficult quarter, spokespeople for Ascend and Cascade and many analysts believe the Ascend/Cascade merger is reasonable: It gives the combined entity a product portfolio which includes ATM and frame relay switching, Cascade's forte, and access concentration, Ascend's forte. Don Miller, chief analyst for networking services, said, "A networking company has got to have access concentration, modems, routers, frame relays and ATM. The merger makes Ascend/Cascade more formidable against Cisco."

Telephone Carriers

The combined entity also may benefit Ascend/Cascade by synergies between the regional telephone carriers, Cascade's main customers, and ISPs, Ascend's main customers, at a time when telephone companies offer more Internet services and phone companies offer more communications services.

Cisco currently is the clear leader in the network equipment industry with some estimating that Cisco claims 85 percent of the router market. Cisco's Mr. Outcalt admits, however, that at least for now, Ascend is the leader in remote-access servers. But he foresees some challenges for the new Ascend, into which Cascade will fold.

For instance, most successful mergers, said Mr. Outcalt, occur when a large company acquires a smaller one for its intellectual property. When two companies of equal size merge, such as is the case with Ascend and Cascade, the company must "articulate a coherent strategy, and meld its sales force and management teams." Ascend and Cascade must also deal with the east/west split between Ascend's headquarters in Alameda, Calif., and Cascade's base in Westwood, Mass., said Mr. Outcalt. Some observers called to mind the similar geographic dislocation between SynOptics Communications and Wellfleet Communications, which merged in 1994 to form Bay Networks; Bay was until recently a strong competitor to Cisco and 3Com, and lately has been going through a painful reorganization under a new CEO.

Acknowledging the Bay Networks experience, Ascend executives noted their company has previously made acquisitions in New York and Minnesota.

In terms of possible layoffs resulting from the merger, executives from Cascade and Ascend say it's too early to tell if any will be necessary. In terms of management changes, Mory Ejabat will remain as Ascend's president and CEO, and Bob Dahl will remain as CFO.