Newbridge Networks' Affiliates Program Paying Dividends

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Newbridge Networks

(NN)

likes to spread its name around.

In the last week the company has introduced two affiliates,

SpaceBridge

and

Bridgewater

. And now a small legion of fledgling tech firms bear the Newbridge stamp: Their clever names vary from

CrossKeys

to

Castleton

. For five years Newbridge Chief Executive Terry Matthews has cut a simple deal with entrepreneurs: I'll offer business savvy, financing and a respected brand name. You just give me a technological edge. Sometimes Matthews invests his own money or takes the seat of chairman.

That tactic seems to be working. Newbridge stock climbed 3 7/16 to 48 on Wednesday in the wake of positive preopening comments from the president on

CNBC

. Also on Wednesday, Newbridge and its partner,

Siemens AG

, announced an upgrade to its flagship "asynchronous transfer mode" (ATM) products. Investors seem convinced that the soft profits reported Tuesday evening marked only a blip on the screen. Other networkers also gained ground, with

Cisco

(CSCO) - Get Report

up 2 5/8 to 78 3/8 and

Ascend

(ASND) - Get Report

up 1 7/16 to 48 1/16.

A Newbridge holding company usually takes a 33% equity interest in the affiliates, and venture capitalists often acquire another third. Each of the 15 or so affiliates intends to go public in coming years. So far the contribution to profits is immaterial to the investor's eye, and only two affiliates are shipping products in volume. But get ready -- another eight affiliates likely will bring their wares to market this fiscal year, and determine the success of Newbridge's patient "build rather than buy" strategy.

For example, two-year-old

Starvision

is starting to ship both hardware and software to phone carriers that allows them to run videoconferences between hospitals and schools. Newbridge hopes that customer-pleasing feature warms phone companies to the notion of buying its new ATM products.

Bridgewater, meanwhile, builds software that lets phone carriers or Internet service providers manage Newbridge's 36170 ATM product more efficiently. Customer tests will start in October.

"They're going way out in front of the market" to fuel demand for ATM, says Tom Nolle, president of the

CIMI

consulting firm in Voorhees, N.J., whose clients include Newbridge and most other networkers.

Fore Systems

(FORE)

and other vendors are reacting to opportunities rather than creating them, Nolle says. "Newbridge has a greater potential in the long term." Newbridge also competes with fellow Canadian

Northern Telecom

(NT)

.

Newbridge's cautious investment strategy contrasts sharply with the voracious expansionary plans of its peers. Leading networker Cisco has purchased 19 companies outright since September 1993 and intends to buy five to 10 annually for the foreseeable future. Acquired units generate fully 20% of its revenue, according to a company official, and they've been accretive to earnings. Cisco also has taken minority interests in 12 other concerns and pours millions into its internal R&D.

"They're paying a much higher premium for their revenue stream," says Chris Albinson, director of the Newbridge affiliate program. "Our strategy requires much less capital," while still allowing Newbridge to lock in the advantages of a budding technology and boost earnings more in the longer term.

Money manager Marc Klee says that Cisco's management takes bolder risks in adopting new technologies, and fetches a higher return as a result. Klee co-manages the

John Hancock Global Technology

fund

(NTTFX)

, which owns shares of both Newbridge and Cisco.

But Newbridge deserves credit for taking fewer chances. One analyst at a Canadian investment firm, who asked not to be named, says that by taking entrepreneurs under its wing Newbridge helps foster their corporate culture in a more advisory fashion.

"These really are junior Newbridges," he says. "I think the fit is excellent." Cisco faces more serious integration issues as it takes the reins from hard-charging entrepreneurs. While one of his firm's mutual funds owns shares of Newbridge, Cisco is not a holding.

Cisco tends to wait for a sizable market to develop before pouncing. Witness the July 1996 stock purchase of leading switch maker

StrataCom

, in which Cisco reacted to a brewing market.

"Cisco asks, 'where do we need to be today?' whereas Newbridge says, 'where do we need to be tomorrow?' " explains John Thiessen, manager of U.S. equities for

M.K. Wong & Associates

. His firm owns shares of Newbridge.

Soon investors will see whether a lot of nurturing, with little risk, can yield a hefty payoff.