Slowly but Surely, Tellabs Tiptoes Onto the Net

With its purchase of NetCore, Tellabs can move more easily into the market for Internet gear.
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SAN FRANCISCO -- It's taken months of deliberation, but telecom supplier Tellabs (TLAB) has made a sharp turn onto the Internet with its purchase of Internet-router maker NetCore.

Tellabs said Wednesday it will acquire NetCore for stock worth $575 million. An 85-employee start-up based in Wilmington, Mass., NetCore is testing its first product, a router that carriers can use to relay 10 million phone or modem calls at once -- at least 10 times the capacity of

Cisco's

(CSCO) - Get Report

largest router.

The router will help Tellabs reach out to the new generation of carriers that rely on packet-driven Internet equipment, rather than the voice-signal phone circuits that are Tellabs' bread and butter.

"They're reinventing themselves," says Joanna Makris, an analyst with market research firm

Yankee Group

. Tellabs now will appeal to young Internet service providers and carriers in particular, such as

e.spire

,

Intermedia

and

2nd Century

, she says.

Tellabs CEO Michael Birck says the deal gives the Lisle, Ill., concern an important leg up in the telecom industry. "We would have been at a disadvantage" without NetCore, he says.

For 25 years, Birck has grown Tellabs by following a slow-and-steady business model of providing plumbing for older phone circuits. Birck has remained calm while his peers attacked the Internet.

Lucent's

(LU)

CEO Richard McGinn, for example, has snapped up more than 20 companies during the past three years, including recent grabs

Ascend

and

Nexabit

, the latter of which competes with NetCore in high-capacity routers.

Not Birck. After his vaunted deal with fiber-optic systems supplier

Ciena

(CIEN) - Get Report

collapsed in September, he returned to the caution that has helped Tellabs meet Wall Street expectations for seven quarters running. Birck knew his company's core business would give him time to articulate an Internet

attack plan that entailed some R&D and a little shopping of his own.

On Wednesday, Birck finally squeezed the trigger.

Birck says Tellabs held preliminary talks with NetCore about an alliance last fall but shelved them until he could see how well NetCore's Internet router would work. "In the last few weeks, we realized they could indeed pull it off," he says.

Tellabs expects the deal to dilute 1999 earnings -- estimated at $1.26 per share by

First Call

-- by 1 to 2 cents, and be neutral or accretive to the estimated earnings of $1.59 per share in 2000. Tellabs stock dropped 1 13/16, or 3%, to 67 9/16 Wednesday.

Louis Giglio, portfolio manager of the

American Express Financial Advisors Strategy Aggressive Fund

, which holds Tellabs shares, lauds Birck for executing the carefully plotted move. With the NetCore purchase, Tellabs has addressed one of the chief concerns among investors, that it lacked Internet systems, he says.

"They did need that in their toolbox," says Tim Savageaux, an analyst with

Volpe Brown Whelan

. NetCore will help Tellabs keep customers from running to Ascend, according to Savageaux, who rates Tellabs buy. Ascend, now a part of Lucent, has been developing a product that competes with Tellabs' so-called cross-connects. (Volpe Brown has no underwriting relationship with Tellabs, Lucent or Ascend.)

NetCore's technology may also help Tellabs develop new lines of business and upgrade its current products to carry Internet packets. "I think there are a lot of product extensions that can come from this acquisition," says Ned Brines, vice president with money manager

Roger Engemann & Associates

, a longtime owner of Tellabs and Cisco. "It has to put to bed some of the fears about their ability to grow."

NetCore is one of several start-ups that investors and telecom giants believe could take some business from Cisco, which has long held an iron grip on the market for routers, the complex computers that send signals between the computer networks that make up the Internet.

Wall Street believes carriers and ISPs are ready for an alternative to Cisco. Case in point: Router manufacturer

Juniper Networks

(JNPR) - Get Report

, which nearly tripled from its offering price on its first day of trading last Friday to 98 7/8. On Wednesday, Juniper climbed another 33 1/2, or 29%, to 149. "Cisco will have to sweat to make their money," says Mukesh Chatter, CEO of Nexabit.

Despite the applause for its NetCore acquisition, Birck seems unlikely to start shooting deals left and right. "This is not a gunslinger," says Giglio.