Posted: 10/1999
Lucent on Buying Spree; Acquires INS, Excel,
Xedia
By Ken Branson
Lucent Technologies Inc., continues to exchange its stock and cash for intellectual property, brains and customers. In August alone, the Murray Hill, N.J.-based big-box maker announced its intention to acquire a professional services firm, International Network Services Inc. (INS), Sunnyvale, Calif., for $3.7 billion; a rival switch maker, Excel Switching Corp., Hyannis, Mass., for $1.7 billion; and an Internet protocol (IP)-based virtual private network (VPN) company, Xedia Corp., Acton, Mass., for $246 million.
Lucent executives, quizzed about their acquisition strategy, reply that they don't have an acquisition strategy; they have a business strategy, they say, and acquisition is one way to fulfill it. Lucent seems to be especially active in Massachusetts, where, in addition to INS, Excel and Xedia, they have acquired Kenan Systems Corp., Cambridge, a billing software company.
"What they're really buying, Kenan aside, is top-flight engineering," says Robert Rosenberg, chairman of Insight Research Corp., Parsippany, N.J. "They are using that, essentially, to further drive their own internal engineering folks in a certain direction, or quicken time to market with some key patents. When they get these little companies, they're getting patents."
For Lucent's prime competitors, the goal of finding "top-flight engineering" and filling in competency gaps is the same, but the methods have been different. Cisco Systems Inc., San Jose, Calif., has made its share of acquisitions as it begins to grow from its origins as a router maker. Indeed, Cisco recently announced its entry into the optical transport business with the pending acquisitions of Cerent Corp., Petaluma, Calif., and Monterey Networks Inc., Richardson, Texas, for a combined $7.4 billion in stock. Cisco also made a foray into the professional services arena by announcing its intention to invest $1 billion in the Internet services business of KPMG LLP, New York. Under the agreement, KMPG is to hire 4,000 Internet integrators over the next 18 months. Cisco's sales force is to find customers--carriers and enterprises--for which those new KPMG hires will develop integrated, Internet-based services.
This unabashed tie-in between KPMG's Internet-related professional services and Cisco's products may give some customers a bad moment or two when they consider hiring KPMG for such services.
"If you're the network operations guy (at a carrier), you might say to yourself, well, gosh, are they (KPMG) as disinterested as they once were?" Rosenberg says.
But the custom of tying professional services to one's products is unlikely to shock such "operations guys" for long. Nortel Networks, Richardson, Texas, insists on some "investment" in its products from a carrier before its offers its professional services, according to Mark Dill, Nortel's vice president of market development.
"We're refining business model, but at this point, we absolutely require a certain level of investment in Nortel products before we offer the services," Dill says.
INS will be part of the Lucent NetCare organization, which is itself only about a month old, having been formed from disparate parts of Lucent to handle what Patricia Russo, Lucent's vice president-strategic planning and corporate operations, describes as "services and support for next-generation networks." Russo and her colleagues often have said that Lucent intends to lead the way to next-generation networks by providing "the four S's: systems, software, silicon and services." INS, she says, fills some gaps in the services category, particularly with IP expertise.
INS, founded in 1991 and a public company since 1996, provides network consulting and software to its enterprise and service provider customers. Its customers range from the school district in Simsbury, Conn., for which it designed and implemented a computer network, to the Hong Kong Airport Authority, for the new airport for which INS configured switches and hubs.
Russo and INS CEO John Drew point out that Lucent's NetCare organization and INS have a similar revenue mix--"55 [percent] to 60 percent enterprise; 40 [percent] to 45 percent service provider," Drew says. INS, in its most recent quarter, counted 43 percent of its revenue from service providers, which Drew says is a 162 percent year-over-year increase.
Much of that increase, he says, comes from new service providers. "Clearly, the service provider segment, with the proliferation of new service providers, and the need for help, is growing more rapidly," Russo says. Drew says he expects the revenue mix to be 50/50 in the next 12 to 18 months.
