After Fore, There Are Slim Pickings in Networkers

GEC's purchase leaves little for other would-be acquirers, especially those looking for ATM technology.
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Now it's just table scraps.

London-based conglomerate

General Electric Company

joined the bandwagon of European telecommunications companies raiding U.S. data networkers Monday when it swooped down to grab

Fore Systems

(FORE)

for around $4 billion cash -- 79 times its earnings for its fiscal year ending in March.

The buyout by GEC, which isn't related to

General Electric

(GE) - Get Report

of the U.S., closes an important chapter the consolidation of this industry.

While networking king

Cisco

(CSCO) - Get Report

and telecom giants such as

Lucent

(LU)

and

Ericsson

(ERICY)

will continue to forage for network hardware, they will not find viable switch or router companies on the public market. Those networkers have mostly been acquired.

"At this point, all the consolidation that's been talked about has happened," says analyst Martin Pyykkonen with

CIBC Oppenheimer

. Pyykkonen started covering six companies with Oppenheimer in early 1998; three have been acquired.

Nortel

(NT)

snapped up

Bay Networks

in late summer; Lucent will close its merger with

Ascend

(ASND) - Get Report

by late June. Today, Fore agreed to be acquired.

After nearly doubling in five weeks amid expectations of a takeover, Fore gained 38% Monday to finish at 33 3/4 -- close to its $35 a share cash value fixed by the deal.

3Com

(COMS)

tacked on 3/4 to 26 9/16, and

Cabletron

(CS) - Get Report

jumped 1 5/16 to 9 1/2.

Fore had "scarcity value," Pyykkonen says, because it deals almost purely in a network technology called "asynchronous transfer mode," or ATM. Although Fore struggled in competing with Cisco for corporate accounts, its ATM switches will enable carriers to blend voice and data calls on their networks. With Fore gone, there is a dearth of companies offering refined ATM systems -- technology it would benefit

Tellabs

(TLAB)

and Ericsson to acquire as they prepare their product lines for future networks.

Acquirers might find ATM switches more easily among networking start-ups -- provided they can convince them not to go

public.

Among the remaining publicly-traded companies, 3Com and Cabletron do not specialize in ATM.

Newbridge

(NN)

, an ATM supplier based in Kanata, Ontario, has ATM switches, but like 3Com, it has some less attractive product lines and is large enough to be an unwieldy partner. Cabletron, meanwhile, has lost market share to Cisco.

Rumors have circulated on Wall Street that either Ericsson or

Siemens

might buy the Santa Clara, Calif.-based 3Com for its switches and Internet access gear, but it's hardly a simple proposition because 3Com relies so heavily on modems and PC-adapter cards, which have razor-thin profit margins. Much of the takeover talk, which resurfaced Friday, involves carving up the company into separate business units. 3Com is valued at $9.6 billion, or 26 times profits in the last four quarters, and is expected to grow earnings 17% in the fiscal year ending May 2000.

Meanwhile, Wall Street scrounges for leftovers. Cabletron remains the subject of tireless merger speculation. "There's always the old standby," says one institutional trader.

Although the Rochester, N.H.-based Cabletron streamlined operations and squeezed out a profit last quarter, during the fiscal year ended February, net loss nearly doubled to $240 million. Cabletron is expected to earn 36 cents in the fiscal year ending February 2000, compared to a net loss of 1.43 per share in fiscal 1999.

Newbridge is saddled with slowing sales of a dying technology called "time division multiplexing," or TDM. Newbridge trades at $6.8 billion, or 42 times earnings. Newbridge has disappointed repeatedly, but is expected to recover and grow earnings 53% in the year ending April 2000.

But few investors have confidence that these three can prove to be of value to a buyer.