As Lucent Confirms Chromatis Deal, Pressure Builds on Cisco

The tie-up has the potential to compete strongly with Cisco's Cerent in fiber-optic metro products.
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Lucent

(LU)

Wednesday confirmed it would acquire closely held optical-gear maker

Chromatis

for about $4.5 billion in stock. The deal could pressure Lucent rival

Cisco

(CSCO) - Get Report

as the network equipment giants vie for position in a fast-growing segment of the telecommunications infrastructure business.

TheStreet.com

examined the competitive implications of the deal in a piece posted Tuesday.

The following story was posted at 9 p.m. EDT Tuesday

:

A Lucent-Chromatis Deal Could Put Pressure on Cisco

Newer, bigger highways call for newer, bigger on-ramps.

And

Lucent's

(LU)

reported interest in acquiring optical-gear maker

Chromatis

means the nation's largest telecom-equipment manufacturer may gain an edge against rival

Cisco

(CSCO) - Get Report

in the boxes that act as on-ramps to the fiber-optic highway.

People familiar with the Chromatis product Metropolis say its greater optical capacity appears to make it a faster, cheaper box that one day may outpace the closest competitor, the products of Cisco's

Cerent

unit. And if you have been following the optical

race, Cisco has some

weakness there.

Cisco snapped up Cerent last year for $6.9 billion after Cerent spent two years developing a device that merges voice and data traffic from smaller networks onto larger networks. This equipment is known as a metro product because it tends to consolidate traffic onto urban beltways that link to long-haul routes between cities.

"Many people think the underlying architecture of Cerent is vulnerable," says

Sanford Bernstein

analyst Paul Sagawa. "Chromatis, from everything I can see, has a pretty cool product that offers a lot more than what Cerent does," says Sagawa, who has an outperform (his highest rating) on Lucent and Cisco. Bernstein does no banking with these firms.

Officials from Lucent, Cisco and closely held Chromatis would not comment on reports that Lucent was offering in excess of $5 billion for the 2-year-old Herndon, Va., firm. A Cisco spokeswoman pointed out that to bolster its metro technology, it agreed to purchase

Qeyton Systems

for $800 million earlier this month.

Swept up in an overall positive day on the stock market, Lucent shares rose 2 3/8 to 51 1/8, a 4% gain, while Cisco finished the day Tuesday up 9%.

Observers say the Lucent/Chromatis pairing makes sense. Doug Green, a former marketing executive with Chromatis, who is now with a new firm,

Ocular Networks

, says Lucent's interest is logical, though he has no specific knowledge about the deal.

'There are a lot of companies out there hawking products but very few of them have actual hardware and real customers," says Green. "They have been drawing a lot of interest from the other companies because they are gaining a lot of mind share," he says.

Chromatis has no revenue and only two customers for its metro product to date: cable-equipment supplier

Antec

(ANTC)

and

Cogent Networks

, a customer Cisco had hoped to win with its products.

The fact that Chromatis is winning business from Cisco and others makes it an annoyance and a worthwhile acquisition, Green says.

Chromatis competes with a slew of networking start-ups developing similar metro products, including

Cyras Systems

,

AstraPoint

,

Zaffire

,

Sorrento Networks

,

Tellium

, and

Alidian Networks

.

Assuming Lucent gets Chromatis, Sagawa says: "At some point,

Nortel

(NT)

will have to pull the trigger" and acquire a metro start-up.

Nortel would not comment on potential acquisitions, but a spokesman contended the company is doing extremely well with metro products developed through the acquisition of a company called

Cambrian

in 1998.

While no one believes Chromatis will single-handedly vanquish the Cerent products, a Lucent-Chromatis combination would put more pressure on Cisco to stay abreast of the technology, says Sagawa.

"I would never call any product a Cisco killer," says Green. "But certainly that product in the hands of a company with a distribution channel of a Lucent or a Nortel is definitely a threat to Cisco."