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April 1, 1997updated 05 Sep 2016 12:36pm

ASCEND SEEKS THE BIG TIME WITH CASCADE BUY

By CBR Staff Writer

US remote access company Ascend Communications Inc went for the big one over the weekend, winning a definitive agreement to gobble-up Cascade Communications Corp for stock in a deal which valued the switching specialist at $3.7bn, or eleven times its 1996 revenue of $341m, on Ascend’s closing price of $52.00 last Thursday. Under the deal, Cascade shareholders will receive 0.7 Ascend shares for every one of theirs when the deal closes in the third quarter. Cascade shareholders would have expected to receive a premium of around $8.00 per share according Thursday’s closing price of $28.30, however a profit warning issued by Cascade over the weekend managed to wipe some $800m off the value of the deal Monday as the market sent Ascend’s stock into free fall, closing down 21%, or $11.25, at $40.75. Cascade lost $2.00 to close $26.37 on the day, all in all shaving almost $6.00 off the premium its shareholders could expect overnight. Cascade said it would report first quarter earnings of $0.15 per share on revenue up 60% at $90m on April 10 – excluding a one-time charge associated with its acquisition of Sahara Networks – compared with analysts’ estimates of $0.22 a share. Ascend shareholders will own around 65% of the enlarged company; Cascade shareholders the remainder. The deal is being accounted for as a pooling of interests and the company will take a one-time charge for costs associated with the merger in its third quarter. As part of the deal each company has the right to purchase 20% of the other’s outstanding shares under certain unspecified conditions.

Plumb the piping

It’s been clear for some time that acquisitive Ascend, which did $549m revenue 1996, would need a leg-up if it is to have any chance to compete with the major networking players following 3Com Corp’s $6bn acquisition of US Robotics Co last month and market leader Cisco Systems Inc’s $4bn Stratacom buy in 1996. The race to provide organizations with end-to-end networking and internet solutions is proving a roller coaster of a ride for companies that can plumb the piping. Much-fancied Cascade has looked highly vulnerable since February when investors’ concern about growth in its frame-relay switch business caused its stock price to plummet 36% in one day, wiping $2.3bn from its market value (CI No 3,092). Even though the company said it would begin to place more emphasis on its Asynchronous Transfer Mode switching products, Wall Street brokerage houses immediately began to speculate about the possibility of an acquisition by Lucent Technologies Inc. While Cascade’s stock had lost 57% of its value since the beginning of the year up to last Thursday, it has not been alone in feeling the effects of the market’s nervousness over competition between vendors of complex networking products; Ascend’s own stock shed more than 35% of its value in the same period. Wall Street’s obvious nervousness about which technology is actually going to make it certainly isn’t reflective of a downturn in the internetworking market which is expected to boom as companies try to plumb their employees, customers and suppliers together in large networks. The combined Ascend will be positioned to supply ISP internet service providers with the fast switching, router and server products they need to service this requirement. IBM Corp and 3Com Corp recently selected Cascade as their key technology partner in their effort to deliver switching Internet Protocol or IP traffic directly over Asynchronous Transfer Mode networks at Layer 2, which is all the rage ever since Ipsilon Networks Inc unleashed the technique on a bandwidth-hungry world last year (CI No 2,923). The technique is claimed to speed up IP throughput by five times. Madge Networks NV announced an IP switching extension to its LANswitch last year, (CI No 3,082), while Cisco has developed its own tag-switching approach. The deal makes Ascend’s other 1997 acquisitions look like limbering-up exercises. It has already bought PSINet’s software unit, InterCon Systems Corp (CI No 3,104) plus Ethernet and Asynchronous Transfer Mode network switching products developer Whitetree Inc for about 1.1 million new shares, valuing the transaction at about $68.2m. (CI No 3,087). Ascend CEO Mory Ejabat will remain president and chief executive of the combined company which will operate under the Ascend name. Cascade CEO Dan Smith becomes executive VP and general manager of a core switching systems unit, one of four divisions Ascend will reorganize into once the acquisition is complete. He’ll be responsible for all ATM, frame relay and IP switching products. The other three are multimedia access products, remote products and access and concentrator products.

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