Buy Vs. Build

Lucent's $20 billion acquisition of Ascend creates a networking giant that offers a broad portfolio of equipment and services to traditional phone companies and ISPs.

But Lucent is not the only turnkey company seeking to expand its technology base and offer a comprehensive range of equipment and services. The Ascend acquisition is the latest in a series of moves by leading network players as they address potential shortcomings.

Mark Wilson, Ericsson director of strategic planning, said Ericsson's data networking business unit has been active in filling out its portfolio via mergers, acquisitions and partnerships, and he said such activity will continue.

It recently acquired remote-access-device manufacturer ACC and bought an equity share in Juniper Networks, a high-speed router company.

"We are building products in switching and ATM in-house," he said.

"For the edge of the network, routing and IP, we are more active in M&A (mergers & acquisitions)."

In the meantime, Nortel Networks' purchase of Broadband Networks allows it to offer a suite of networking products for the LMDS market. The company's merger with Bay Networks, on the other hand, pushes it toward IP telephony.

"Our strategy is around the convergence of the Internet and wireless technology, and to be the leader in that new space," said Matt Desch, Nortel Networks president, wireless solutions. "We needed to have the capability in-house to supply IP-based broadband wireless solutions to customers."

Why this trend to buy instead of develop products in-house?

Eric Hindin, Yankee Group analyst, said it is a time-to-market issue. Start-ups are not as worried about capital because they are venture-funded, but large companies are concerned about the bottom line. A shortage of qualified high-tech engineers and the speed with which technology moves are driving the decision to buy vs. build, he said.

Although acquisition is popular, styles remain different.

Ericsson uses a "string-of-pearls" acquisition strategy to purchase small and medium data-networking companies. Nortel Networks, on the other hand, prefers to acquire large companies.

"A small string-of-pearls strategy, like that of Ericsson and Motorola, you get a hundred people at a time, little technology, and no customers," Nortel's Desch said. "When we acquired Bay, we acquired an installed base, a whole bunch of the routing capabilities, network management and 8,000 IP-literate engineers and people."

Despite acquisitions, the companies still have gaps to fill. Hindin said Lucent remains weak in LAN switching, network enterprise cards, high-speed routers and enterprise routers. Jim Slaby, Giga Information Group analyst, added that it should address IP and frame relay to succeed in the enterprise market.

Slaby and Hindin said Lucent has several options should the company address its enterprise needs through acquisition. Cabletron Systems, Fore, Optical Data Systems, 3Com and Xyland all deal in enterprise equipment. Cabletron and Optical Data Systems are more plausible targets, as both have size and market share and could be acquired more easily.

Since Lucent has moved from doing everything in-house to an M&A strategy, Hindin foresees the day when Motorola buys companies to fill in its holes.

"They could pursue a diversification strategy where they try to enter a variety of different hardware segments," he said.

"They could sell software that enhances the value of their existing hardware and acquire some software companies, perhaps in the area of network management or monitoring."

Slaby said if Motorola leader Chris Galvin would ever be ousted because of low company profits, a new talent might bring a fresh perspective on the wisdom of "buying vs. building."

"Lucent is a company with an incredible arrogance about their engineering talent, too, but their stock price is good, so it is easy for them to throw money around," he said.

"Motorola is not so profitable, and their stock price has taken a beating."