Phone Giants On The Prowl
Like scores of other European executives, Siemens' Thomas Rambold spent much of this winter tramping through the U.S. hunting for high-tech startups. On Mar. 8, he laid out $550 million for two New England Internet-technology companies. The same day, he named an ex-IBMer, Martin C. Clague, to run what promises to be a growing stable of American acquisitions. Siemens might once have summoned Clague to its Munich headquarters, reaching agreement as waiters poured fine wines. But Rambold wooed Clague over coffee in a nothing-special restaurant outside Boston. "They were persistent," says the 56-year-old Clague. "In this business, you have to move fast."
Europe's phone giants are learning that lesson--and none too soon. Under siege by Cisco Systems Inc. and other lithe, young companies, Siemens and France's Alcatel are racing to piece together Internet strategies. The Europeans need to develop a new generation of high-speed equipment capable of handling vast volumes of voice and data traffic simultaneously. They must also meet the demands of big corporate customers with ambitious plans to use intranets and extranets to connect offices, suppliers, and clients. Says Anthony T. Maher, a member of the managing board of Siemens Information & Communications Networks Group: "This is a new wave for us."
TOO FAST. Until recently, the Europeans thought they could ride that wave by developing new expertise in-house. But the $200 billion market for communications equipment is moving far too fast. That's why the action is unfolding almost daily. As part of Chairman Heinrich von Pierer's global strategy, Siemens now plans to fold its new U.S. holdings, which also include an equity stake in Accelerated Networks Inc. of Moorpark, Calif., into a new company, Unisphere Solutions Inc. Siemens has also just confirmed that it is deep into negotiations to expand its joint venture with 3Com Corp., the Silicon Valley networking powerhouse. Days before Siemens made its move, France's Alcatel dished out $2.3 billion for a pair of Silicon Valley companies, Xylan Corp. and Assured Access Technology Inc., which provide digital plumbing for the Internet. Alcatel already owns DSC Communications of Plano, Tex., and Packet Engines Inc., a Spokane (Wash.) startup it acquired late last year.
There's no guarantee the Europeans are getting the choicest assets. North American phone suppliers such as Lucent Technologies Corp. and Northern Telecom Ltd. have beaten the Europeans to the big Silicon Valley data-networkers. Lucent bought Ascend Communications Inc. for $20 billion in January, and Canada's Northern Telecom spent $9 billion for Bay Networks Inc. last summer. The Europeans must now build upon smaller U.S. acquisitions. And for companies such as Alcatel and Siemens, specialists for nearly a century in voice communications, to hesitate is to lose. Analysts say the volume of data on the world's networks surpassed voice traffic last year. Alcatel expects data to tower over voice by a factor of 10 by 2002.
For both Siemens and Alcatel, entering the U.S. market will be an exercise in child rearing. Siemens' acquisitions, Argon Networks Inc. and Castle Networks Inc., both in the high-tech corridor outside Boston, are still developing products. Assured Access, one of Alcatel's catches, began shipping its Internet routers just six months ago. While raising these fledglings, the new proprietors must also stitch their products into unified offerings. And as they incorporate the young companies into their global operations, the Europeans must provide the freedom and flexibility of technology startups, along with sweet financial incentives. Otherwise, they risk losing the engineers and programmers who are the core value of the acquisitions.
CHOKED. It's a tricky business for giants such as Siemens. There's not much about Silicon Valley that will be familiar to Continental executives accustomed to gilded traditions of hierarchy, protected markets, and sacrosanct summer vacations. Even among U.S. companies, more than one high-tech merger has foundered over the years as the result of culture clashes. AT&T choked on computer maker NCR after its 1992 takeover and spun it off at a loss of $4 billion only five years later. Says Douglas M. Dunn, dean of Carnegie Mellon University's business school and a former AT&T executive: "There's often a natural conflict, and if you expect the acquired companies to change, you kill them."
The Europeans can ill afford such debacles--especially given that Cisco is heading into their traditional turf. While its roots are in the data industry, the Silicon Valley titan is spreading into voice--and challenging the telephone suppliers at home. In late February, Cisco announced a breakthrough $60 million contract to build a nationwide Internet-based communications system for Telia, Sweden's national operator.
It's Cisco's first move into a full-service network in Europe, and it's using its riches--$10 billion in cash--to provide Telia with an arrangement that keeps capital costs down: Telia will sell the gear to Cisco and then take it back on a lease. "This is a template for what we're going to be doing in Europe," says Mattheus J. Wegbrans, Cisco's vice-president for Northern Europe. "We've got the technology, and now we're moving it into their marketplace."
Most analysts agree that buying technology is the Europeans' wisest route. It's their best chance to grow in the U.S. marketplace, where data-networking trends are a year or two ahead of Europe and Asia. But the pitfalls are daunting. One is whether Siemens and Alcatel have bought the right companies. Given that they have acquired untested startups, the danger is that they may turn out to have the wrong combination of strengths.
Expanding quickly enough is another challenge. And with competitors gobbling up acquisitions, the trick is to eat on the run--without getting indigestion.
Here again, Cisco is the master. It has acquired 24 companies over the past three years without a blip in its 40% growth rate and 33% return on equity. "They're all going to have to get swifter if they're going to compete with Cisco," says Arthur Klein, president of Assured Access, which was only three years old when Alcatel paid $350 million for it. "Those guys can do an acquisition over a weekend."
At least the Europeans are learning that money talks. At Assured Access, there are 100 workers, only 55 of whom are engineers. But Alcatel has set aside $60 million for production bonuses. Unlike Cisco, with its booming stock, Alcatel and Siemens are hard-pressed to excite workers with stock options. This forces them to pay more out of pocket. But, says Pascal Aguirre at consultants Renaissance Worldwide Inc. in Newton, Mass.: "There isn't much of a choice, at least for those companies interested in survival." The hunt is on.