In recent years, it has become customary to think of the big three inare the front runners? networking as Cisco, 3Com and Bay Networks - or big four - if you include Cabletron.
In corporate finance terms, the big three is less a triumvirate, and more a case of Cisco towering less over 3Com and Bay than the rest of the market.
According to estimates, Cisco's market capitalisation currently stands at $64 billion, three times that of its four closest competitors combined. As Cisco turned over $6.4 billion in 1996/1997, its market capitalisation suggests shareholders have a touching faith in the company's ability to continue its inexorable profits and sales growth, quarter in, quarter out.
While Cisco dominates Wall Street, the rest struggle behind, handicapped by their perceived inability to supply end-to-end Lan-to-Wan systems.
In turnover terms, 3Com, Bay and Cabletron are running Cisco much closer, and Cisco's product breadth doesn't encompass a truly end-to-end system - yet. As Andy Palmer, UK general manager of 3Com's enterprise systems division says, Cisco's idea of networking begins and ends either side of the router. A little cattish perhaps, but there is a grain of truth in this.
It certainly explains why Cisco bought five switching companies last year in an attempt to ride the trend away from big fast routers into Layer 3 switches, offering the same performance - or so it is claimed - at a tenth of the price.
Cisco may be vulnerable to this technological swing - but this is relative. Any company that can sell $15 million of networking equipment a day from its Website - as it did in the last week of January - is a company in rude health.
Cisco can and will acquire its way out of trouble. And where Cisco leads, the rest of the industry tends to follow.
The networking industry is set for another bout of mega-mergers, aimed at combating Cisco's dominance. As Palmer says, this was part of the rationale behind 3Com's $6.5 billion takeover of US Robotics (USR) last year. New markets and new technologies were the other attractions.
Following Cisco's Stratacom acquisition last year (by far its most significant acquisition to date), 3Com needed to make a purchase that ensured it could keep up, and USR was the answer.
Corporate customers also want to deal with fewer suppliers, according to Palmer. Even after the USR acquisition, 3Com lacks key Wan products to supply end-to-end systems from the desktop to the enterprise.
Bay is also missing key elements in its lineup. Cisco, 3Com and Bay will fill in the cracks through acquisition. In the past three months, for example, Bay has bought two companies, Rapid City and New Oak Communications.
On the sidelines, big telecoms players like Lucent, Nokia, Nortel and Siemens are hovering. The convergence of voice, data, video, computing is finally beginning to happen. It seems to be the future. And telecoms equipment companies want a piece of the action - even if they are in no particular hurry to grab it right now.
Compaq is another potential predator. It is beginning to count its networking revenue in the billions and has already acquired niche networking companies, Thomas-Conrad, Networth and Microcom.
The manufacturer is still a second division player in the networking market, peddling hubs, network integration cards and remote access - typically, but not exclusively, bundled in Compaq hardware - in the Lan space. But in March, it is moving up the networking food chain with gigabit Ethernet products based on technology bought in from Extreme Networks - in which Compaq has a stake.
According to Ian Whiting, UK head of Compaq's Communications Product Group, the company intends to grow its networking business by 300 to 400 per cent this year, with a view to climbing on to the top table in 1999.
By the year 2000, Compaq's stated aim is to be a top three player in every category it operates in. This is a tall order indeed, admits Whiting.
'We need to grow quickly, and that means we have to enter new markets or acquire capability.' No one can write off Compaq's muscle - but to get to top three, it would have to buy a Bay Networks or a Cabletron.
These are the hunters, but who are the prey? One doesn't have to look very far - you only have to look at the 20 or so second division players, including Newbridge, Ascend, Madge, Fore, Shiva and Olicom. They have fewer product lines and that makes them vulnerable to takeover.
Bay and 3Com have both earned their place on the top table through mega-mergers. In Bay's case it took a couple of years to overcome the shock to the system after the company was founded by knocking Synoptics and Wellfleet into one.
3Com's $6.5 billion takeover of USR was intended to leapfrog the company over Bay and into second place in the networking market. In turnover terms, 3Com has achieved its goal. In terms of stock price, channel consolidation, business unit aggregation, 3Com still has a long way to go.
The trouble with successful mega-mergers is the time they take to bed down. Some takeovers are crocked from the beginning. Newbridge's consummation with UB Networks is a case in point. In January 1997 it acquired UB Networks, which has turned out to be a complete disaster. Wan specialist Newbridge thought UB could get among the big boys. The trouble is, Newbridge is too small - even with a thriving UB under its wing - to compete end-to-end.
The truth is, UB was relying heavily on its maintenance base. Product roadmaps had as much in common with reality as medieval charts mapping out '... where there be dragons'. Last month, 3Com and Newbridge Networks signed a deal to supply end-to-end alliance that basically puts Newbridge subsidiary UB Networks out of the frame.
Newbridge says 3Com will supply a migration path for customers inherited through the UB takeover. And it says it has no plans for UB product development.
Instead, the wide-area specialist will resell 3Com Lan products with its MultiProtocol-over-ATM switched routing system. 3Com in turn will resell Newbridge's MainStreetXpress 36170, an ATM Wan switch.
Both companies expect to announce updated network management products.
If only Newbridge had approached 3Com earlier. The failure of the UB acquisition effectively puts Newbridge into play as a takeover target. 3Com would be considered the obvious predator, especially with the Newbridge technology alliance under its belt.
However, it has only recently swallowed USR and has a lot of digesting to do before it's ready to take on another big company.
Cabletron - king of the hubs - has another acquisition strategy. This year's $430 million acquisition of Digital Equipment's networking equipment business, in theory, adds more than $1 billion turnover - although this depends on how much Digital on-base business it retains against Compaq.
The modest price paid reflects Digital Networks flat performance in recent years. But Cabletron does gain some fast Ethernet switching technology.
If this is any good, Cabletron will be seen to have bought Digital Networking on the cheap. It's a big if.
However, it is clear that US networking vendors are prepared to pay enormous sums for new technology. Fast switching and cable modems are particularly hot. Last month, Cabletron made its long expected move into gigabit routing switches through the acquisition of startup Yago Systems.
Cabletron, which already owns a minority stake, is paying up to $213 million in its own stock for the company. The exact details are predicated on future movement of Cabletron's share price. Upfront, it is paying Yago 6.1 million shares of stock, currently worth $85 million. If the shares move up to $35 apiece in 18 months, Cabletron won't have to stump up any more paper. But if shares don't reach $35, the company will have to issue up to 5.5 million shares to make up the difference, for a total value of $213 million.
Cabletron's move has been welcomed by US analysts, who say the purchase will fill a gap in the company's networking product line. But at what price? Gigabit router companies are attracting crazy valuations - the sort of money that used to splashed out on startup biotechnology companies.
Californian-based Yago is essentially an R&D firm, with only 50 employees.
It has one product, the MSR 16000, in beta testing. This is a 16-slot chassis built for wire-speed routing on up to 30 gigabit Ethernet ports.
Traffic is forwarded through Yago designed ASICs on each interface card.
ATM and other Wan modules should be announced this month.
The price Cabletron is paying for Yago indicates its lateness on the gigabit Ethernet scene. The company has to lessen its reliance on the commoditising hubs scene if it is to retain its place at the top table.
Other companies are paying fortunes for Silicon Valley R&D startups and the US venture capital industry is making a killing. But for how much longer?
At some point, they will have to question the value for money these R&D buyouts are providing. Meanwhile, it's a good time to make big money.
While new technology startups are feeding into the consolidation, the same is true for owners of technology which, if not exactly tired, look like they will fail to meet growth curve expectations.
Who wants Madge or Fore? Fore has failed to impress in recent months, along with Newbridge, Ascend, Madge, Shiva and Olicom. All must be considered in play.
Fore, Newbridge, Shiva and Madge are obvious takeover candidates; Ascend could go either way - as hunter or hunted - while 3Com, Cabletron and Bay are obvious predators. Newbridge and Ascend should find prospective buyers easily enough. They have technologies that companies like 3Com and Bay Networks want.
The Lucents and Siemens are also prospective predators. Two years ago, Fore was the king of the ATM market. Analysts now consider reliance on this technology as a liability. With the market forecast to swing in favour of gigabit Ethernet at the desktop Lan level; ATM retreating back to the Wan, where if we are honest, it never really left. The ATM market will still grow in volume terms.
Dataquest, for example, forecasts the worldwide ATM access concentrator market will grow from $76.9 million in 1996 to $1.28 billion in 2001, tripling to $205.4 million in 1997 and doubling again this year to $375.5 million. But profit is a different matter. Fore is reported to be slashing prices by 20 per cent this year.
Last month, Madge sold its Dublin manufacturing plant to a Canadian electronics services company for an undisclosed sum. According to reports, the sell-off supplied Madge with a 'welcome infusion of cash'.
There could be some defensive mergers in the second division. Olicom and Madge would be obvious candidates for knocking together into cost-saving Token Ring City. I'm playing at financial engineering, of course.
Saying something would make sense is a sure-fire guarantee it will never happen.
But the defensive merger has an honoured place in the networking industry, according to Palmer, who points to 3Com's acquisition of Chipcom by way of example. 'We took out our biggest competitor,' he says. On the low-end NIC front, economies of scale will rear their ugly head. Beyond Intel, 3Com and Compaq, the big three in NICs, there is huge scope for consolidation.
Vicious Intel-led price battles have already claimed casualties like Microdyne, which more or less invented the market with the first Novell networking cards. We can expect an enormous amount of consolidation in the networking equipment industry. For below the market leaders, the industry remains highly fragmented.
In analyst presentations last month, Cisco claimed the industry will end up in the hands of a big five. But who will the winners be? Cisco and 3Com have already earned their place. Bay Networks and Cabletron could make it, either on their own but more likely as part of larger combines.
Telecoms equipment suppliers will make a major impact in coming years, while Compaq is the dark horse. Everything is still to play for.
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