ALCATEL EYES NORTH AMERICAN NETWORKING MARKET

July 28, 2000

COMMERCIAL NEWS

San Diego, CA — Wylie Wong reports that European telecommunications-equipment companies are battling for a piece of the hot North American networking market, but so far, France’s Alcatel has mounted the fiercest offensive and made the biggest inroads, analysts say.

In the past three years, Alcatel has invested about $16 billion in seven North American networking companies, culminating in this year’s $7.1 billion purchase of Canadian Newbridge Networks. The company also created a $150 million investment fund to enable it to take stakes in U.S.-based start-ups and recently launched a $25 million advertising campaign.

Foreign companies are hoping to penetrate the North American market because it accounts for 60 percent of all networking revenue, analysts say. They’re buying North American networking companies to gain access to their customer bases and sales staff.

“(Alcatel) is pretty strong, given their Newbridge acquisition. It showed the industry that they were truly making a solid commitment to North America,” said analyst Jeremy Duke of Synergy Research Group. “Of the bunch, they’re making the biggest commitment and the most progress.”

Alcatel and other European telephone-equipment makers, including England’s Marconi, Sweden’s Ericsson and Germany’s Siemens, are snapping up North American-based data-networking companies to compete against local leaders Cisco Systems, Lucent Technologies and Nortel Networks in the market for equipment that speeds Net traffic for businesses, telecommunications carriers and Internet service providers.

More specifically, these companies are racing to build new “converged” equipment that combines voice and data on a single Internet-based network.

Alcatel, a leader in selling digital subscriber line (DSL) equipment to service providers such as SBC Communications, bought Newbridge in February to spruce up its ISP networking offerings.

Newbridge is developing a set of high-end, Net-based equipment that combines voice and data traffic, technology that Alcatel didn’t have but needs if it wants to compete against Cisco, Nortel and Lucent. Newbridge is also a leader in asynchronous transfer mode (ATM) technology, which sends voice and data signals over networks at high speeds.

Previously, Alcatel bought six other businesses, including U.S. networking companies Xylan, Packet Engines and Internet Devices.

“Alcatel, at this point, is the most successful of the European invaders,” said analyst Chris Nicoll of market research firm Current Analysis. “They focused on the U.S. market a lot earlier and have a head start.”

Other European rivals, however, have not stood still. Since late last year, Britain’s Marconi has combined two U.S. acquisitions – networking company Fore Systems for $4.5 billion and fiber-optic company Reltec – with its own telecommunications-equipment unit to form a division called Marconi Communications. The company also has launched a $100 million venture capital fund to invest in U.S. start-ups.

Siemens has purchased several start-up networking companies, including RedStone Communications, Castle Networks and Argon Networks, and Ericsson acquired equipment maker Torrent Networking Technologies for $450 million.

Analysts say the European companies face a big challenge in tackling the U.S. market, but that the companies have a chance at success, especially in emerging, fast-growth markets such as optical equipment and metropolitan networks. Optical equipment allows service providers to send larger amounts of Net traffic across their networks at faster speeds.

Every player is entering the burgeoning optical market on equal footing, said Current Analysis’ Nicoll.

“We will see a new balance of power between incumbents like Cisco, Lucent and Nortel and those new entrants from Europe,” he said. “No one is behind. A Siemens or an Alcatel can bring to the party the corporate resources, the services and support that large service providers are looking for. And they can take some market share.”

Of the $150 billion in worldwide communications-equipment revenue in 1999, Cisco leads the pack with 44 percent of the market that includes data networking and Internet-based gear, according to Synergy Research Group. 3Com placed second with 17 percent, followed by Nortel with 11 percent and Lucent with 6 percent. Alcatel and Newbridge combined for 2.4 percent of the market, while Ericsson captured 1.8 percent and Fore Systems, now owned by Marconi, got 1.6 percent.

In the overall communications market, which also includes traditional phone systems called “PBXs,” Lucent placed first with 19 percent, followed by Nortel with 14 percent, Ericsson with 12 percent and Cisco with 9 percent. Alcatel and Newbridge combined for fifth place at 7.8 percent, while Siemens collected 7.5 percent of the market.

Analysts say Alcatel, which also sells optical gear and components, is in a good position to capitalize on the North American market. While its European counterparts still have holes in their product families, Alcatel’s is nearly complete.

The company later this year will release a high-end router for service providers to compete with Cisco and young networking company Juniper Networks. Analyst Raj Mehta of market research firm RHK said the new router, which manages heavy Net traffic, will fill the largest gap in Alcatel’s product portfolio.

Alcatel executives are optimistic that the company can compete against domestic leaders Cisco, Lucent and Nortel. Cisco, for example, has historically been a data-networking player and is still new at selling and installing telecommunications equipment for service providers, executives said.

“Each of them have their own weaknesses,” said Krish Prabhu, Alcatel’s chief operating officer and chief executive of the company’s North America unit. “Lucent can be attacked, and we have done that successfully with some wins with AT&T. Nortel does not have the close relations with the Bell companies. (It’s) not part of the Bell system as Lucent was, and Cisco’s challenge is servicing a Bell Atlantic or SBC that has millions of customers.”

North American sales account for 23 percent of Alcatel’s $25 billion in annual revenue. Company executives hope North American sales will continue to grow at 40 to 50 percent per year, Prabhu said.

He estimates that the North American market represents 40 percent of all telecommunications sales. Decisions made by U.S. service providers influence sales internationally, which makes Alcatel’s success in North America crucial to the company’s bottom line, he said.

“In Europe, we’re very well known, but in the U.S., we’re invisible and we need to get our name out,” he said. “Establishing credibility may take some time against the well-entrenched competition. The beauty of American customers is they don’t care where you’re from. You just have to prove yourself.

Investors are taking notice as Alcatel’s shares are reaching an all-time high. In the past year, the stock has more than tripled, from the low $20s to about $75. And Wall Street analysts expect that the company tomorrow will report second-quarter earnings of 32 cents per share, according to a survey by First Call/Thomson Financial.

Analysts have mixed views on Alcatel’s stock. Several firms, including Morgan Stanley Dean Witter and UBS Warburg, rate Alcatel a “strong buy,” while Goldman Sachs gives it a “market outperform.”

Analyst Syed Haider of Frost Securities said Alcatel’s stock has been undervalued and is catching up with rivals that have fared better on Wall Street.

“They’ve been pretty erratic in the past few years and have come out with profit and sales warnings,” Haider said. “But now they’ve been having steady growth.”

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