Network vendors continue acquisition trend

Network vendors continue acquisition trend

There have been a slew of network companies announcing acquisitions, continuing a trend which shows no sign of stopping soon.

Interestingly, the companies doing the buying were a mix of large and small firms. These included Lucent and Nortel, as well as Akamai and Kana Communications, which have huge market capitalisations thanks to Wall Street's current infatuation with Internet stocks.

In fact, the biggest dollar deal was made by Kana Communications, which sells software that helps companies better manage e-mail. Kana set down $US4.2 billion in stock to buy Silknet Software, which writes applications that let e-business customers check on orders.

That's a big bite for Kana, a company that ended 1999 with a net loss of about $US119 million, but boasts a market capitalisation of about $US6.5 billion. It also seems a pretty penny to pay for a company that pulled in just under $US8 million in revenue and lost nearly $US4 million in the last quarter.

"It should translate into newer and more capabilities faster, and these capabilities should be better-integrated," says George VonGehr, managing partner of Alliant Partners, a US firm that specialises in mergers and acquisitions.

"For example, when a major vendor like Cisco buys two VPN vendors, it can be expected that the acquired devices will be well-integrated with Cisco's management platform. They can also expect them to work with Cisco gear," VonGehr says.

The acquisition trend will continue as long as large vendors need to fill gaps in their product lines and as long as it is faster to buy than to build the missing gear, adds Christopher Nicoll, an analyst with Current Analysis in the US.

Anthony Abate, a principal with US-based com-pany Battery Ventures, notes that in addition, start-ups with enormous market capitalisations will continue to buy to justify the value Wall Street places on them. These newcomers have easy access to funds that they use to buy other companies.

Abate says those purchases should be designed to broaden the buyer's product line and bring in a new stream of revenue. As long as they show the potential to do these two things, deals can be justified. Abate claims, "It's a land grab. You grab first and worry about profitability later."

Snapping up other companies also keeps them away from the competition, VonGehr says. "If you buy it, that means somebody else didn't."

Larger companies, such as Cisco, Nortel and Lucent, buy for other reasons, such as filling specific gaps in their product lines, comments Nicoll.

Large companies also buy smaller ones that have new technology. Nortel plunked down $US3.25 billion last year for Qtera to get its hands on the start-up's patented long-haul optical technology. "Sometimes bigger companies need the innovation of smallercompanies," VonGehr says.

The merger-acquisition trend is becoming a cycle that feeds itself, Nicoll says. As start-ups get absorbed, their top executives get restless and move on to form more start-ups, which also get bought.

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