A Marriage Of ConvergenceGary Mcwilliams
Investors didn't cotton to the July 5 news of a $1.2 billion merger agreement from computer networking heavyweights SynOptics Communications Inc. and Wellfleet Communications Inc. Wellfleet's stock dropped 20% on the announcement; SynOptics' lost 7%.
Get past the market angst, though, and the merger embodies a powerful drive toward consolidation in networking. SynOptics is second after Cabletron Systems Inc. in the $1.9 billion market for "hub" computers that connect local office networks; Wellfleet trails only Cisco Systems Inc. in the $4 billion market for "routers," key components to nationwide and global networks. The union would provide customers with "one-stop shopping," says SynOptics Chief Executive Andrew K. Ludwick, who would head the combined company.
Indeed, analysts say converging network technologies are blurring traditional market divisions. "These markets are increasingly coming together," says Gigi Wang, a vice-president at researcher International Data Corp. She predicts that companies without the resources to keep abreast of rapid technology changes will be forced to combine--or fall by the wayside. Indeed, without the merger, earnings could fall 24% this year--to $71.5 million, at SynOptics. Wellfleet's high-price niche has come under attack from dozens of lower-cost suppliers.
As new, even higher-speed technologies reshape the market, analysts say, suppliers must invest huge sums in research and development--putting smaller companies at a disadvantage. More important, customers want fewer suppliers knocking on their doors. Stephen White, manager of local-area networking for Chevron Corp.'s Information Technology Co., wants "one network-management system to troubleshoot and support these different technologies." Bring on the mergers.