Nortel Networks Corp. is buying Internet switching company Alteon WebSystems in an all-stock deal valued at a whopping $7.8 billion. The buyout would strengthen Nortel in its switching battle with Cisco Systems.
Nortel will deploy Alteon intelligent content switches and routers in its Internet data centers to make its content delivery faster, more efficient, and more reliable. Alteon would become a wholly owned subsidiary of Nortel. Alteon president and CEO Dominic Orr would be president of Nortel's Content Distribution Network business unit.
"There will be an explosion of mobile commerce, which will further the need for technology to handle that traffic," says Ron Westfall, an analyst with Current Analysis. Cisco is not lacking in wireless capabilities and will rely on partnerships to enhance its product line, he adds, but Nortel has the telecom background to combine Internet content distribution with mobile commerce.
The deal calls for an exchange of 1.83 common shares of Nortel stock for each share of Alteon stock. Based on Thursday's closing price of Nortel stock at $78.63, Alteon shareholders would receive $144 per share. The deal is expected to close at year's end and is subject to regulatory and shareholder approval.
Although the price seems steep, "Alteon is well worth its weight in Internet gold," Westfall says. Nortel lacked high-end content switching in its portfolio of Internet data center offerings. "This acquisition serves as an indication that we're getting closer to having the Internet generate profits not only for infrastructure vendors, but also for content service providers and dot-coms," he says.
In midday trading, Alteon shares slipped more than 9%, to $129-29/64, while Nortel's stock dropped nearly 7%, to $73-1/8.