Nortel Networks Inc announced late Monday that it will acquire customer relationship management software vendor Clarify Inc for $2.1bn in stock. The deal for Clarify – which bills itself as the world’s second-largest provider of front office software for e- business, behind Siebel Systems Inc – comes as the latest move in the increasingly acquisitive CRM space. Vantive Corp, which previously held the number two spot in the market, was scooped up last week by PeopleSoft Inc for $433m in stock.

The acquisition, the first of its kind by a networking vendor in the CRM space, came as a surprise to industry watchers and investors alike. Analysts have long been predicting consolidation in the ERP/CRM space as a way of providing customers with an integrated front office/back office offering. That was the reason for PeopleSoft’s acquisition of Vantive and the same reason why ERP giants Oracle Corp and SAP AG are rushing to develop their own CRM application suites. But why Nortel would want a CRM vendor is not immediately clear.

For its part, the networking giant says it wants to capitalize on the second wave of e-business and claims the acquisition effectively creates an industry leader in technologies, applications, and services that will drive such a new wave. The company reckons the first wave was largely centered on individual transactions but that the new focus will be on the customer, by enabling personalized interactions and a more complete experience – which in turn should increase customer loyalty.

Just as the data and telephony markets used to be entirely separate, but are now converging, so the networking and CRM businesses are coming together, said Bill Connor, VP of Nortel’s enterprise solutions business. Connor wouldn’t give any specifics about exactly what it plans to do with Clarify’s CRM suite, although he noted it would not be integrated into any of Nortel’s offerings per se rather the vendor would offer bundles or packages of Clarify software on Nortel hardware. Nortel already offers a call center application of its own, so presumably the two will have to be integrated over time. But other than that, there were no firm details as to what platforms Nortel intends to port Clarify’s software to.

It’s even less clear to see why Clarify would want to be bought by a networking vendor like Nortel which can offer Clarify nothing in terms of back office software, let alone integration. But Ben Kiker, VP of corporate marketing described the acquisition as a perfect fit. Kiker said CRM/ERP integration wasn’t the key issue at all, and that Clarify had gone to Nortel for its valuable infrastructure. It’s not about combining the front office and back office, we’re there already, we’ve figured that out, we have dozens of ways we can do that, he said. Our customers are focused on building high-performance networks to take advantage of the internet. He said Clarify had chosen to go with Nortel because it was the number one vendor in optical networks, because it was the leading CTI vendor in the US and because it had the best wireless infrastructure available.

That infrastructure is critical as the future of CRM moves away from the desktop and an operator sitting on the phone and towards a mobile world where sales people and customers are accessing their networks wirelessly. He added: Why in the world would we want to partner with an ERP vendor? They’ve all got depressed stock prices and the market for ERP software is shrinking every day. Find me one person that had anything positive to say about PeopleSoft’s acquisition of Vantive.

Instead, the two companies feel their unique combination will present a massive challenge to stand-alone CRM vendors, as the e- business market will demand a more integrated software and hardware approach. When asked about ongoing competition from the likes of Siebel, Oracle and SAP, Clarify CEO Tony Zingale said that the tie-up with Nortel effectively places the combined company in a new market altogether. Let them rip each other’s heads off [in the old market], have a good time…we’ll see them later, Zingale said. As for Siebel, effectively now the sole major pure-play CRM vendor, he warned, The music’s stopped and there are no more chairs left.

Under the terms of the acquisition, Clarify shareholders will receive a fixed exchange ratio of 1.3 Nortel common shares for each share of Clarify stock. Based on Friday’s Nortel closing price of $52.69, the deal amounts to $68.49 per share for Clarify, a 57.7% premium over its Friday close. Nortel closed at $52.375 on Monday, down $0.3125, while Clarify rose $1.9688 to $45.3125.

The price also represents a roughly ten-times multiple over Clarify’s expected revenues this year. That fact may give rise to the same kind of criticism that Nortel faced last year when some industry watchers charged that it overpaid when it agreed to hand over $9.1bn for Bay Networks Inc. Nortel expects the deal to be neutral to earnings per share in calendar year 2000 and accretive in 2001, excluding acquisition-related charges. It declined to provide more specific guidance, however. The transaction will be accounted for as a purchase and will be tax-free for Clarify’s US shareholders.

Upon completion of the deal, which is expected in the first quarter of 2000, Clarify will become a wholly-owned subsidiary of Nortel and will be folded into Nortel’s enterprise solutions business unit. All of Clarify’s 800 employees and key executives are expected to transfer to Nortel, the company said, and Clarify will keep both its San Jose headquarters and CEO Zingale. Nortel adds that the purchase will give it more than 4,000 employees in Silicon Valley. More details are expected to emerge over the next few days.

Separately, Clarify announced preliminary results for the third quarter. The company expects to report revenues of $62m to $63m and earnings per share above consensus estimates, which currently stand at $0.19 per share. Clarify will announce its complete results for the quarter on October 21.