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February 5, 1997updated 05 Sep 2016 1:07pm

AFTER THE STORMS, ARE CALMER WATERS AHEAD AT BAY NETWORKS?

By CBR Staff Writer

By Tom Foremski

When Bay Networks announced the amicable but sudden departure of its chief executive Andrew Ludwick and chairman Paul Severino at the end of October, no-one was surprised. Even with Ludwick still in place, headhunters working for the company had been making discrete enquiries in their search for a capable, high- profile successor. The problem was obvious. For some two years, Bay Networks has been seen as the ‘sick man’ of the high flying network equipment sector, puzzling shareholders and analysts alike with its sluggish performance. While the revenues, profits and share prices of competitors 3Com and Cisco Systems Inc have skyrocketed, bolstered by successful acquisition sprees, Bay has stuttered forward, with small revenue increases, patchy profits and a cautious acquisition policy. It has been hampered by several key problems.

Integrating Wellfleet

These began with difficulties in managing and integrating its founding merger – of Wellfleet, a $440m router company and Synoptics, a $690m supplier of hubs. This was compounded by a confused leadership structure, with former chief executive Andrew Ludwick based in California and former chairman Paul Severino in Massachusetts; delays in producing key products; channel conflicts that have impacted sales; and a damaging ‘brain drain’ with dozens of senior engineers leaving to join other firms or start their own. Bay came into being in 1994 from the merger of Santa Clara, California-based Synoptics Communications Inc and Billerica, Massachusetts-based Wellfleet Communications Corp. It was considered a merger of equals, with both firms almost identical in size, revenues and with complementary products. Wellfleet had emerged as a clear second to Cisco in the booming router market, and was forecasting continued fast growth; Synoptics appeared to be losing to Cabletron Systems Inc in hubs, but was expected to get a boost from its connection with routers. While it was hoped that the merger would create a unified company, it in fact caused a split. Ludwick, chief executive of Synoptics, was, in many ways, a reluctant leader who lacked the skills to manage a growing company. Severino disliked the nuts and bolts of management, preferring a ‘visionary’ role. Analysts say that he neglected the vital short term challenges in a growing market with aggressive competitors. Against this background a change in management at Bay seemed inevitable. The board selected as its new chief executive, president and chairman David House, a senior Intel executive, and both Ludwick and Severino resigned. House has an impressive track record, managing the successful ‘Intel Inside’ campaign. The appointment of House was welcomed by Bay investors, who pushed up the company’s stock by almost 50% in the weeks following his appointment. House has certainly won the approval of analysts. They believe that he will bring much needed marketing expertise to Bay and will quickly make decisions that are necessary for Bay to respond quickly to changing markets. House has not yet revealed his game plan – but he has sent out Bay’s top executives on punishing road tours to visit key customers and has instituted an internal program soliciting the views of hundreds of Bay staff. Bay says that part of its problem is failure to communicate its vision, to its customers and to Wall Street – because the network equipment market is so complex. In the acquisitive networking equipment market, high stock valuations are crucial. With stock prices high, 3Com and Cisco have been able to use paper to make acquisitions of companies that have key technologies, while to Bay, the same companies have seemed relatively more expensive. Bay’s strategy, both before and after the arrival of House, involves acquisitions, alongside developing its own technologies. I don’t think our valuation will be a problem because we are looking at intellectual property type acquisitions rather than actual products, Eyestone says. But before Bay embarks on an acquisition spree, it must clarify its strategy and its view of where the market is heading. One obvious trend is the move towards switching partly at the expense of routers – the traditional cash cows of Bay and Cisco. We did miss the trend to switching but we were not alone, says Eyestone. Cisco and 3Com have had the same problem. But hubs and routers are not dead and the market is still growing. Although growth is more modest, in the 15% range, it is still a viable market. After waking up to the move, Bay does have good switching technology, especially through its acquisition of Centillion Networks Inc in 1995, analysts say. But the key will be to manage the transition to switches while still making money from the more traditional market of hubs and routers. Several vendors are now competing to provide a coherent mixed switching/router architecture, and Bay’s solution now suffers from the fact that it can no longer claim a clear leadership.

New market opportunities

Bay believes it has now identified key opportunities, especially in making networks easier to administer and in adding security. Bay is looking to acquire companies with such expertise and is developing products in-house. The company has also been attempting to solve its distribution problems. After the Wellfleet and Synoptics merger, the direct and indirect sales forces clashed on who should sell what, and at what prices. So in May 1996, Bay created two new business units, the Enterprise and Internet-Telecom units to take advantage of demand for frame relay services and focus on large enterprises where it is head- to-head competition with Cisco. While the initial Wellfleet- Synoptics merger had long term problems, Bay has done better with its more recent acquisitions. In 1996, it acquired Performance Technology for $13m for its LAN to Internet access products. It also bought Israel-based Armon Networking for $33m for its network management tools, and the DSP modem business of Penril Datacomm Networks for about $124m. And it paid $59m for LANcity, which makes cable modems. But even these acquisitions have not been without hitches – there have been some problems integrating the newly-acquired products into the Bay architecture and other promised products have been delivered late. The lack of momentum and the low share price has inevitably attracted takeover interest, with Lucent Technologies, recently spun off from AT&T, a possible suitor. Lucent’s acquisition of switch maker Agile Networks Inc has not quelled the speculation. IBM has also been mentioned as a potential buyer. Bay has also suffered from a brain drain, with the booming venture capital funds in Silicon Valley luring its top talent to start up companies – a problem that Cisco and 3Com also face. But analysts mostly agree that House should do a good job at Bay, though as one points out, he won’t have too many chances to make mistakes. It’s a fast moving market with some very aggressive competitors.

An expanded version of this article appeared in the January 1997 edition of Computer Business Review

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