Ascend Expected to Announce Sale of Unwanted Unit

An analyst applauds a sale, no matter the price.
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UPDATE:

After this story was written, the

Financial Times

published a report Monday morning that telecom supplier

Lucent

(LU)

is negotiating to merge with Ascend -- a long-rumored possibility. The

FT

says the companies might announce a merger valued at more than $16 billion as early as Wednesday.

A Lucent official declined to comment, and Ascend officials could not immediately be reached for comment.

Data networker

Ascend

(ASND) - Get Report

is expected to announce today that it is selling off the first of three unwanted units of

Stratus Computer

, a company it acquired last fall as part of a plan to branch into voice networks.

Investcorp

, a Bahrain-based investment group who is perhaps better known for its holdings of

Gucci

(GUC)

,

Saks Fifth Avenue

(SKS)

and

Circle K

, will partner with Stratus managers to acquire Stratus Enterprise Computer. Executives intend to close the deal this quarter and Ascend's sales of two smaller divisions are likely to be disclosed shortly, according to company spokespeople.

Ascend, busy with Stratus' core telephone-network technology, is offering the extra operations at a bargain basement price. Investcorp will pay between $100 million and $150 million cash for the equity and bank debt of Stratus Enterprise Computer, with an estimated revenue of $275 million last year. Steve Kiely, CEO of Stratus Enterprise Computer, said on Friday that the price is fair and falls in the range of expectations. "Our objection wasn't to realize a high price, it was to realize the right home for this unit," Kiely said.

In October Ascend paid $822 million in stock to acquire Stratus. According to Kiely, it likely will receive about $150 million for unloading all three unwanted divisions, which comprise the bulk of the original Stratus workforce.

Analyst Bill Rabin with

J.P. Morgan

isn't worried about the price that Ascend is receiving for Stratus Enterprise Computer. Ascend, he says, is ridding itself of baggage. "To me the only concern is if they had trouble getting rid of it or if they let it linger on," says Rabin, whose firm has no banking ties to Ascend. Rabin rates Ascend a buy.

Ascend furnishes telephone carriers with computer-networking gear. Stratus' technology enables enhanced features like 800 toll-free dialing.

Investcorp, has built a tidy business channeling Middle Eastern money into Western deals, but has ben quiet of late. In 1997, Investcorp's net income rose 20% to $108.6 million. The firm has scored big by coming in at the right time -- it rescued luxury-goods maker Gucci in the early 1990s, for example -- but until now it has shied away from technology gambits.

"We're not a venture capital firm," says Investcorp manager Christopher Stadler. He sees Stratus Enterprise Computer as a low-risk wager on a new technology wave.

Stratus Enterprise Computer builds computer servers that process transactions for clients like the

Nasdaq Stock Market

and the

Boston Stock Exchange

. The company is rigging new versions of its technology, which currently functions on Windows NT operating systems, for the future Windows 2000 product from

Microsoft

(MSFT) - Get Report

. Investcorp might have to be patient: The release date of Windows 2000 remains unclear, as does a turnaround time in the Asian markets, where weakened business damaged Stratus' revenue last year.

As for Ascend, according to a

First Call

survey of analyst estimates, on Jan. 19 the company is expected to report third-quarter earnings of 31 cents per share, up from 24 cents a share one year earlier. Ascend stock has doubled since early October; on Friday shares finished at 71 7/16, up 1 3/8, or 2%.

Ascend trades at 65 times profits for the past four quarters, compared with a ratio of 114 for

Cisco

(CSCO) - Get Report

, a leader in data networking.