Nortel takes over Silicon Valley switch maker

Nortel Networks, the Canadian networking group, is continuing its drive to dominate the Internet equipment market by agreeing to acquire a Silicon Valley upstart for $7.2bn in shares.

Nortel said on Friday that taking over Alteon WebSystems, which makes content-aware web switches, would allow it to build next-generation data centres. These centres enable Internet service providers and e-commerce sites to deliver content to Internet users faster and more efficiently. Content-aware switches let Internet service providers and e-commerce sites identify user profiles and needs, and connect them to servers at high speeds.

Analysts say content-aware switching technology will facilitate the next-generation wireless Internet, which is expected to change traffic patterns. But investors were not impressed by the deal and drove down Nortel shares by 7.3 percent to $72-3/4 by the close of the trading day on Friday. Alteon shares fell 9.8 percent to $129 amid a broader high-technology sell-off. Based on Nortel’s closing share price Thursday of $78.62, the deal initially valued Alteon at $7.8bn, or $144 a share.

The acquisition is the latest of Nortel’s efforts to expand its networking equipment portfolio. The company is battling Cisco Systems and Lucent Technologies, both of the US, to develop the technology for next- generation networks. This year Cisco acquired ArrowPoint Communications, which makes similar web switches.

Nortel, citing an International Data Corporation forecast, said the market for content switching was expected to grow from $203m in 1999 to more than $4bn in 2004. Alteon had $52m in revenue in its last quarter, up 82 percent from the previous three-month period.

Nortel said the acquisition was expected to be neutral to earnings per share in calendar 2000 and slightly accretive in 2001. Reuters