The European telecom giants are on a quest to beat the Yanks.
And they are searching for their holy grail on a brief stretch of Interstate 495 outside of Boston, where a gaggle of entrepreneurs is trying to reinvent the networks that connect computers and telephones.
After years of sitting on their hands, German electronics concern
are snapping up small U.S. companies in an effort to leapfrog North American powerhouses
The Europeans' latest potential target is
, Westford, Mass., which is rumored to have received competing bids from suitors Lucent, Siemens and Alcatel. Redstone makes routers, which help carriers and Internet service providers expand their networks while adding advanced services such as videoconferencing and telephone calls over the Internet. The bids are said to be in the $400 million range. Lucent declined to comment, and neither Alcatel nor Redstone returned calls seeking comment.
On Tuesday Alcatel said it will pay $2 billion in cash for Calabasas, Calif.-based
, primarily a builder of computer switches for corporations. Then, just yesterday, Alcatel disclosed plans to buy
, a Californian supplier of Internet dialup gear, for $350 million.
But the real excitement is in Massachusetts, where
plans to acquire Westford, Mass.-based
for $300 million in cash, according to a person familiar with the matter. The deal also calls for a $15 million performance-related bonus. Siemens also will buy
, in Littleton, Mass., for $200 million in cash and $38 million in incentive pay, which typically goes to recent and future hires at the acquired companies. Officials at Siemens, Castle and Argon declined to comment.
Collectively, the 12 or so Massachusetts start-ups have the potential to forge tomorrow's Internet, according to analyst Paul Johnson with
BancBoston Robertson Stephens
. On Thursday Johnson launched a Web site for Robbie Stephens, "nextgenerationnetworks.com," where he argues that the Internet as we know it is dead.
"The new networks will look like the Internet, but will offer much greater scalability while at the same time offering the robustness and ubiquity of the current circuit-switched
telephone network," writes Johnson, echoing a column he published in
Castle, Argon and Redstone are clustered in office parks northeast of Boston. They and several neighboring firms are run by veterans of networking companies who left
, which were eventually consolidated into Nortel and Ascend.
Castle Networks has shipped test versions of a switch that allows phone companies to combine their old voice switches with the Internet, rather than replacing them. Argon has a switch router that carries data messages through both Internet protocol and asynchronous transfer mode, but still works snugly with old telephone architecture.
And the Massachusetts gang will play a big role. Here is where the Europeans have found the technology that might spring them ahead of Lucent and Nortel. "Strategically, it's brilliant," says Johnson. But "I think execution is very difficult."
Indeed, Siemens and Alcatel come late to the acquisitions game. And they must exploit U.S. entrepreneurial talent without stifling it. Vice President Hilary Mine with
points out that telephone-switch maker
, located in Boca Raton, Florida, has benefited little from being folded into Siemens in 1990. Mine says the Yanks must stay independent and avoid the bureaucracy across the Atlantic.
No wonder Alcatel will base its Xylan division in the U.S. and keep its management intact. Alcatel will simply sell its products through its global distribution channel.
European acquirers, historically a cautious lot, must give their new employees loose rein. Analyst Adnaan Ahmad with
advises the Europeans to "create a new company," with an independent chief, and base it in the U.S.
Analyst Pim Bilderbeek with
says cultural differences will play into the mergers: U.S. workers, especially in technology, take more risk. They'll sign up more willingly with start-ups, according to Bilderbeek. And they find that failure isn't such a liability: "It's actually a good thing on your resume," Bilderbeek says.
Making a merger work is also a challenge for Lucent and Nortel, which have made big purchases of their own. Lucent plans to combine its telephone operations with the Internet company Ascend in an $18 billion acquisition later this spring. Similarly, Nortel is working to integrate
, which it bought in September.
The addition of the European players will intensify competition with Cisco, king of today's Internet, as it tries to attack the phone business. Principal Craig Johnson of the consulting firm
says Cisco might even lose business from Alcatel, its biggest reseller in Europe, as the two compete more fiercely in the U.S. For the record, Cisco says it's still tight with Alcatel.
But now Cisco must show it can stay ahead of the pack.