Nortel's $9.1 billion acquisition of Bay Networks last week has. brought the fashionable issue of convergence into the spotlight. As corporations increase the grey area between voice and data services, telecoms equipment makers need to buy expertise in data networks, while the largest data firms take the more ambitious step in the opposite direction, acquiring voice and carrier class products.
On paper, at least, the Nortel-Bay alliance seems a logical combination. But however good the theoretical fit, the deal will come with all the usual risks and problems of a merger. In addition, the companies will suffer from extensive product overlap.
One analyst at Merrill Lynch said: 'This could be a more painful merger than Wellfleet and Synoptics (which led to the formation of Bay). And in such a fast changing market, nobody can afford too much time trying to fit companies together.'
Predictably, the two companies were keen to play down product overlap, but their chief executives admitted that a quarter of Nortel's business comes from enterprise systems also targeted by Bay.
John Roth, head of Nortel, stressed that the partners want to focus on their common ground in IP to create a desktop-to-carrier IP supplier of a type that does not currently exist. 'Voice networks need to handle data, people who build data networks are moving into the carrier space,' he said in a teleconference. 'This is a new industry category that needs the attributes of both. IP competency in backbone networks does not exist anywhere.'
Through its Aptis acquisition, Nortel has a range of switches and concentrators that compete head-on with Bay's Versalar 15000 range. Both companies offer similar network management, DSL (digital subscriber line) and remote access equipment.
The overlap of several product lines has inevitably led to speculation that the axe will soon fall on certain ranges and jobs. The companies will not comment on this as yet, but some analysts are predicting swinging cuts, particularly on the less financially stable Bay side.
Dave House, CEO of Bay, is not known for flinching from difficult decisions.
He will head Nortel's enterprise networking operations, boosted threefold by the addition of the new company, and will be responsible for any restructuring.
His experience is likely to help avoid some of the problems that beset the merger of Wellfleet and Synoptics, a process from which Bay has only just recovered. Those two companies were too slow to take hard product and people decisions or to integrate their ranges, and found it hard to meld divergent cultures, ranges and even locations.
House's former career at Intel taught him tough ways, but rapid integration of the two firms will be vital. However, he denied that Bay and Nortel would consolidate in a single headquarters.
Even where products do not overlap, they are not necessarily suitable for both companies' customer bases. The idea of offering an IP-oriented range to all clients seems simple, but Roth admitted there will be a lot of work to make Bay's products robust and scalable enough to meet the needs of telecoms carriers.
'The challenge is to do this as rapidly as possible,' he said, without providing details of how this might be accomplished without a big R&D effort. Conversely, many of Nortel's products are too complex and expensive for all but the largest corporates.
It is not just product lines that will clash - partnerships and strategies also seem to be in opposition. One of these is Nortel's relationship with Shiva. This may fall by the wayside as Shiva's remove access and virtual networking kit competes with the range acquired this year by Bay when it bought New Oak Communications.
Channel policies also raise thorny dilemmas. Nortel has a powerful direct salesforce and this is already worrying Bay resellers, who fear the company will compete with Bay's channel. Bay had already encountered criticism from its own Vars for moving its products more heavily through direct sales, in a bid to target corporates through its own salesforce as well as commodity markets via retailers.
Observers believe the commodity end will be downplayed by the enterprise-focused Nortel, taking Bay out of 3Com's and Intel's sights and focusing it more directly on Cisco. Bay will have more weight to do this than it has in recent years, since it will be merged into Nortel's Enterprise Data Networks arm.
This had revenues of only $785 million last year, but will add significant direct sales clout, corporate contacts and installed base to Bay's $2.09 billion operation. And the market impact of the parent company will give Bay more standing among corporates, putting an international player with revenues of more than $15 billion - dwarfing even Cisco - behind its efforts.
For all the possible difficulties, the acquisition has changed the ground rules in the convergence market and will force other players to adapt.
By grasping the IP space where enterprise data, carrier voice and ISP networks meet, Nortel has taken the high ground.
Its voice rivals, such as Lucent and Cisco, must react to this initiative.
Both have been on the acquisition trail to move into voice-data systems, but have bought nothing on the scale of Bay.
If Nortel can integrate Bay quickly and relatively painlessly, it will have gained competitive advantage in a market where IP accounts for 50 per cent of the backbone.
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