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Making a big merger look easy

Making a big merger look easy

The rapidly rising amount of data traffic that is carried over the world's networks has necessitated a sharp change in strategy for telecommunications manufacturers who have prospered for years on the sale of large circuit switches. To keep up with the rate of change, networking and telecommunications equipment vendors have been forced to either acquire or merge with competitors. Former Bay Networks chief executive officer and current Nortel Networks president Dave House recently discussed the process of merging a data networking company with a large telephony equipment manufacturer, as well as recent developments in the networking industry. IDG's Sumner Lemon reports.

On the strategy to merge Nortel and Bay:

House: Big mergers are hard. There's no question about that. Big mergers are tough, and merging companies out of different industries makes it even tougher.

In doing this, the thing is to do it at a pace that's as fast as you can but no faster. We're doing this merger in bite-sized pieces, and each piece gets harder.

The first piece is you put Bay inside of Nortel. That's pretty easy, it's a line of business. It's kind of like portfolio management. You keep the same facilities, the brand name, compensation policies, badges. That's the easiest merger.

The second one was to move the enterprise data business of Nortel into Bay. That is, the Passport line, the multi-service platforms, the voice-over-IP products. That was moving a $US1 billion business into a $US2.5 billion business. That was a little harder, but the people all come from the same backgrounds and they understood each other. They had this "time is of the essence" mentality. We've got that one done.

Now we're in the third phase of the merger. We're merging the enterprise businesses together - the telephony business and the data business.

We're combining the organisations, the compensation system, and the product lines and the product launches - and that's the bigger merger. That's the one we announced at the beginning of last month, and it's probably the toughest one to absorb and to execute. But at that point you've kind of got it all together - that's what customers want.

On the cultural challenges posed by the merger:

The biggest challenge is the incompatibility in the speed of operation. Bay and the data companies that it competes with tend to operate very fast. The telephony companies have traditionally gone for quality, quality, quality, and time can be sacrificed.

If there are 10 ways of doing something, eight of them can be made to work. So just make sure you've got one of the eight and go on, because there are more issues right after you. The nature of somebody from the telephony industry would be to say, "OK, out of these 10 ways, are there five more that we should be thinking about? And of those 15, which one's really the best one?"

If it takes a little longer to figure that out, their natural inclination would be to choose quality over time, where the data guys tend to go for time over quality.

That's probably the biggest issue. It manifests itself in lots of different ways. Clearly going forward, we have to be able to deal with both of those in the unified network, in the unified company.

On the merger's progress to date:

It's going well for two reasons.

One is customers like it. Customers have seen their networks unifying. They're hearing one set of stories from their voice suppliers and another set from their data suppliers, and they're not the same.

We're able to come in and give them, for the telephone-savvy customer and the data-savvy customer, stories and maps they understand and migration paths they can realise to get them to the same spot, the same vision, the same place.

The other thing is that the engineers see it as positive because this is the bleeding-edge stuff, this is where it's happening - voice and data networks coming together. First of all, the network is where it's happening. Twenty years ago it was the microprocessor, 10 years ago it was the PC, and today it's the network where it's happening.

On his worst nightmare:

Cisco is probably going to buy a company that makes telephony equipment at some point in the future. Unless the market cap changes around, they can more easily buy a telephony equipment manufacturer than a telephony equipment manufacturer can buy them. The question for them is how big a company do they buy?

If you asked me for my nightmare it would be them buying Siemens' telephony business. That would be a nightmare because Siemens has a very large international presence, they've got a strong relationship with the telephony accounts, they know all the buyers and decision makers. They've probably known them all their lives. They probably know their kids and their sports, where they went to college.

They've got their relationships. They've got the sales, service, and support organisations around the world to handle high-availability networks; they've got the technology and the expertise to build high-availability networks. They've got a lot of critical things.

If Cisco's going to grow organically from the inside, it's going to take them a long time. Companies tend to underestimate their shortcomings.

On Alcatel's acquisition of Xylan:

That's a little bit like trying to tie two rocks together to make them float. Xylan has not been a strong force in the market recently.

If I was Alcatel, I probably would have bought them. I'm not saying it's a bad acquisition. I just don't see Xylan being able to transform Alcatel.

I know how hard it was for Bay, as big and as strong as it was, to transform Nortel, which is the most advanced thinking of any of the telephone equipment manufacturers. So Xylan trying to change Alcatel - it's not possible.

On the future of other networking companies, such as Newbridge, 3Com and Ciena:

I think they will get acquired or will get niched. They'll grow below the industry growth rates. Businesses can hold on for a time by specialising, limiting their scope. It's a slow-death scenario. v


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