When in doubt, follow

Cisco

(CSCO) - Get Report

.

Over the last couple of trading sessions, investors found themselves tantalized by rumors of a blockbuster Internet infrastructure merger, between Cisco Systems and

Ciena

(CIEN) - Get Report

. And while the widely speculated tie-up looks like a figment of the Street's collective imagination, the lingering sentiment is that the logic behind such a deal makes sense.

That means some observers are expecting to see a wave of mergers among optical networking companies -- think Ciena,

Nortel

(NT)

and

Lucent

(LU)

-- and Internet router companies, such as Cisco,

Juniper Networks

(JNPR) - Get Report

,

Extreme Networks

(EXTR) - Get Report

and

Foundry Networks

(FDRY)

. These deals would allow networkers to cover new ground by offering their customers products using both technologies -- a goal of Cisco's. Networking stocks rallied Tuesday as the broader market rose sharply, led by a solid rebound in tech issues.

Spanning the Globe

Ciena became the rumor

du jour

Friday as speculation mounted that Cisco was in talks to buy the optical switch and transport-equipment maker. Cisco has been seeking to break out of the computer networking business and into the much-larger telecommunications market. The general thinking among observers is that a Ciena buy would solve a big part of that market-entry problem.

Ciena's president and chief operating officer, Gary Smith, dismissed the rumor Monday in an interview at the

UBS Warburg Global Telecom Conference

at the Plaza Hotel in New York. "These things come up from time to time," said Smith. "There have been lots of rumors about it." Meanwhile, a person close to the Cisco camp says no Ciena acquisition is in the works.

Jazzed?
Ciena's 2000 run-up, vs. Cisco

But Foundry's president and chief executive, Bobby Johnson, expects Cisco to chart the course for the industry. That, he says, points to increasing consolidation among optical players and router makers. For instance, someone listening to Johnson could come to the conclusion that Foundry's seven quarters of profitability and sizable customer list -- 60 Internet router customers and 2,700 enterprise, or office-network, customers -- would make a good fit in a Ciena or

Corvis

(CORV) - Get Report

game plan.

Talk Talk

If you believe the pundits, networking's ultimate destination is the optical Internet, which allows talk, text and movies to whiz along on beams of light. And getting there will mean, at some point, combining two separate, though similar, businesses: optical telecom equipment and computer networking devices. Like trains on parallel tracks headed in the same direction, the two branches of networking technology are heading toward a place where coupling makes sense.

"That will be the natural evolution for someone who wants to offer a full-service solution," says

PBHG

(PBTCX)

Technology & Communications fund manager Jeff Wrona, who holds Ciena, Extreme and Foundry.

If the industry follows Cisco's lead and consolidates the two product types under one operation, the next two years could be a busy time for mergers, says Foundry's Johnson.

Don't Believe the Hype

Lucent's acquisition of Internet router maker

Nexabit

typifies the first stage of this consolidation, says Johnson. Nexabit all but vanished after Lucent bought it in a July 1999 stock swap. Johnson calls the deal an example of the buying-of-technology hype. He says the second stage of consolidation will lean more toward real products and real profits.

"The genesis of all corporate mergers," says Johnson, is combining core competencies and driving down costs. Johnson says that as network equipment makers strive to become the one-stop shop for optical Internet supplies, the urge to merge will intensify.

And with equipment spending slowing down and concerns about network overbuilding emerging, cash-hungry equipment makers eventually may come to see merging as the most attractive course of action.