Bay and Cabletron buy into switching

Bay Networks and Cabletron Systems have both bought startup companies to gain access to technology in the fast-moving switching market.

US-based Bay bought New Oak Communications for $156 million, acquiring its access switch products, while Cabletron took over Yago Systems, a Layer 3 gigabit company, for about $210 million.

New Oak's expertise in virtual private networks will allow Bay to help customers set up internet-based business, according to CEO Dave House.

'This gives us a time-to-market advantage over our competitors,' he said.

The startup's products offer greater security when connecting businesses' internal networks to external customers since its switches do not need modems.

Bay will pay $133 million in stock and $23 million in cash for New Oak, leading to a charge in its quarter ending 28 March.

Founder and chief executive, Jeff McCarthy, is a former Bay employee and will become VP of Bay's Extranet access division. The 43 staff which currently work under McCarthy are set to join Bay Networks' internet/telecoms business group.

Analysts said the move gives Bay the product it needs without a nine-month development, and pushes New Oak's product into a bigger sales channel.

The deal follows Bay's takeover of Rapid City last June and Netspeak two weeks ago.

Cabletron already owned 25 per cent of Yago and the deal was expected by insiders, although Cisco Systems was rumoured to be considering an offer for the startup. Yago makes switching routers for gigabit Ethernet and Fast Ethernet networks, its MSR technology helping routers handle larger volumes of data.

Cabletron CEO Don Reed has high hopes for the sales of Yago's products and does not foresee redundancies at the company.

The complicated terms of the deal mean Cabletron will pay for Yago with 6.1 million shares, worth $156 million now and which should be worth $213 million within 18 months. If they are not, Cabletron will issue more shares to make the deal worth $213 million at current prices.