August - 1999 - issue > Cover Feature

If the Latin proverb repetitio est mater studiorum (repetition is the mother of learning) is applicable to mergers and acquisitions, then the market leaders in the communications and networking equipment sectors are on their way to the head of the class. Armed with the strong stock currencies from a sustained bull market, companies such as Cisco Systems and Lucent Technologies have been on a big ticket buying spree that is without precedent. Cisco has acquired over 36 companies in the past five years. Every day seems to brings a new announcement of an early stage communications or Internet company being bought for anywhere from $200 to $500 million. While it’s better to be lucky than good, the entrepreneurs whose companies are getting bought have put themselves in the right place at the right time by creating properties that fill a critical strategic need for a marquee acquirer. The personal wealth created as related to the small amount of time between founding the company to getting acquired is staggering.

Drivers for New Converged Network Solutions
The history of networking is one of dedicated networks designed to support specific strategic lines of business. The public switched telephone network is highly optimized for connection-oriented voice services. Separate parallel infrastructures exist for Frame Relay and ATM data communication services. Even more application specific infrastructures exist for wireless/mobility services and IP-based Internet and VPN services. This history of parallel networks is in the process of being rewritten.

A confluence of technology and economic forces is creating massive upheaval in the datacom/telecom services industry. The demand for improved operational efficiency, lower cost structures and new revenue streams is forcing NSPs to abandon the approach of building a unique network per application in favor of New Converged Networks (NCNs) that are capable of simultaneously supporting multiple lines of business over a unified infrastructure. Tens of billions of procurement dollars are at stake for the large systems vendors who are lining up to be the vendor of choice for the NCN. It is these large networking systems vendors that are snapping up startups to position for a piece of the NCN capital expenditure pie. Competition among NSPs is shrinking their service deployment and capital recovery cycles. This is forcing them to search for vendor partners that can provide end-to-end integrated solutions. The intense mergers and acquisitions activity in the communications equipment vendor community is basically a scramble by the big players to assemble the many complex pieces in order to become a "one stop shop" for the NSPs. Thus, the competitive NSP environment is indirectly responsible for the aggressive consolidation in communications equipment companies.

The telecommunications act of 1996 and abundant low interest capital has spawned more than 2,000 new CLECs that are attacking the core revenue streams of the baby bell companies. Data-centric broadband access providers such as Rhythms and Northpoint are forcing the baby bells to address the "last mile" bandwidth bottleneck that is constraining the Internet tsunami. Leapfrog inter-exchange carriers such as Qwest Communications, Level3 and Williams are heating up the battle for long-distance voice and data traffic against giants like AT&T and MCI/Worldcom. This volatile hyper-competitive cocktail is forcing all players to search for new revenue streams to offset market share losses in their core businesses. The answer for many is a migration to bundled service offerings. In the networking world, the Internet truly does change everything. The maturation of packet-based technologies are forcing NSPs to reconsider how communication services will be delivered. As Cisco Systems CEO John Chambers aptly noted at the Vortex99 conference, the battle between voice and data is over, and data has won. The NSPs are making massive infrastructure investments in fiber capacity, next generation backbone routers, core switches and other high capacity network to keep pace with the exponential growth in data traffic. Dropping prices for bandwidth and the proliferation of the Internet Protocol are stimulating exciting new applications such as voice over the Internet and next generation unified messaging. The insatiable demand for bandwidth invites more entrants such as upstart Global Crossing to enter the NSP ring, and reinforces the cycle.

Telecom vs. Datacom
Two sets of incumbent vendors are making the technology bets today via their acquisition strategies that will determine their long-term viability in the new convergence environment.

The datacom equipment vendors start the race for the NCN with many of the core competencies needed for success. They are shopping for the products and talent necessary to meet the stringent reliability and performance requirements of carrier customers. Similarly, the telecom equipment vendors are in the process of reinventing themselves. Lucent and Nortel have both purchased leaders from the packet technology sector, and appear to be way out in front in this race to infuse the data religion into their culture.

Cisco owns the enterprise, and it has to capture the carrier infrastructure to continue its impressive growth. Traditional telecom equipment giants Lucent and Nortel are on a collision course with Cisco to protect their home market, and are trying to take the battle to the enterprise without losing the core of the NCN to Cisco.