Alcatel to Buy Newbridge in $7.1 Billion Stock Deal

Meanwhile, Newbridge beat earnings expectations by a penny.
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Updated from 7:01 a.m. EST

Putting an end to

speculation, French telecommunications supplier

Alcatel Alsthom

(ALA)

said Wednesday that it had agreed to buy

Newbridge Networks

(NN)

in an all-stock deal that it valued at $7.1 billion.

It had been widely rumored since last week that Alcatel -- from a group of potential suitors that included Sweden's

Ericsson

(ERICY)

, Britain's

Marconi

(MCONY)

and Germany's

Siemens

(SMAWY)

-- would step up to acquire the Canadian telecommunications and data networking company. In fact, Tuesday evening the speculation only increased after Newbridge postponed a conference call to announce its third-quarter earnings report. The results were subsequently released Wednesday.

Paris-based Alcatel will exchange 0.81 American depositary receipt share for each Newbridge share. According to Alcatel's closing price Tuesday of 47 3/4, that's a 13% premium over Newbridge's closing price Tuesday of 34 3/8. However, in Wednesday afternoon trading, Newbridge fell 1 15/16, or 6%, to 32 7/16 and Alcatel fell 4 5/8, or 10%, to 43 1/8. At Alcatel's current price, the deal would now be valued at $6.3 billion.

Alcatel stock were down because the European investors and analysts "know little of Newbridge," said Paul Sagawa, an analyst at

Sanford C. Bernstein

. "All they know is it's a company that's missed a lot of quarters, six out of the last 10." He rates Newbridge a market perform and his firm has done no underwriting for the company.

Meanwhile, Newbridge shares were down because of disappointment over both the acquirer and the price. "Alcatel is not the strongest player out there," said analyst Paul Silverstein of

BancBoston Robertson Stephens

. "Out of the possible acquirers -- Nortel, Cisco, Tellabs, Ericsson and Alcatel -- Alcatel is below all of them. Then there were Siemens and Marconi, which are also second tier." He rates Newbridge a buy and his firm has participated in underwriting for the company.

"For a Newbridge investor, if you were holding out for $40 and now you have Alcatel

buying at $38.68, you've blown out of the stock and you're not waiting around," he added. "They're also concerned that Alcatel stock is going to be down some more and bring down the value of the deal further."

But Sagawa argued that the price was fair. "It's in the realm of reason. The stock's recent run-up is a result of acquisition speculation. Otherwise it would be priced at half of what it is," he said. Indeed, shares of Newbridge have risen 74% since Nov. 18, when the company announced it was looking for a buyer.

"Alcatel can't claim to have gotten a bargain, but it's not an outrageous price to pay," Sagawa said.

Newbridge will merge with Alcatel's carrier data division to form a new carrier internetworking division, with Pearse Flynn, Newbridge's current president and chief operating officer, taking over as president of the new division. He will also become chief executive of Newbridge.

"Alcatel is making a major move to become a worldwide leader in new generation networks, which will handle the explosive growth of data with the appropriate quality of service. This acquisition combines Alcatel's leading position in fast Internet access with Newbridge's strong ATM

asynchronous transfer mode multiservice capabilities," said Serge Tchuruk, Alcatel's chairman and chief executive, in a statement.

Newbridge's franchise of ATM multiservice switching and fixed broadband wireless applications will elevate Alcatel to the status of a major player in ATM switches. Currently, Alcatel has no internal core switching/routing expertise.

Newbridge is not able to go it alone, since the perception of Newbridge is that of "a troubled company that cannot execute its way out of a paper bag," said Silverstein.

The move should help Alcatel in its attempt to compete with North American rivals

Cisco Systems

(CSCO) - Get Report

,

Lucent Technologies

(LU)

and

Nortel Networks

(NT)

in the manufacture of telecom equipment.

Alcatel expects the deal to add to earnings on a post-goodwill basis by 2001, with a slight positive impact on earnings per share in 2000. Also, $150 million of cost savings is expected in 2001.

Separately, Newbridge, based in Kanata, Ontario, issued its third-quarter earnings,. For the third quarter ended Jan. 30, net earnings fell to C$33.9 million, or 19 Canadian cents (12 U.S. cents) a diluted share, from C$47.0 million, or 26 Canadian cents a share, a year earlier. Those figures exclude the effect of items related to acquisitions and non-recurring items.

The consensus estimate of analysts polled by

First Call/Thomson Financial

was 11 U.S. cents.

Revenue rose to C$520.6 million from $450.8 million a year ago.