Earlier this month, Stratus, which makes signaling system seven (SS7) equipment and service control points (SCP), was acquired by Alameda, Calif.- based Ascend Communtications Inc. [ASND] in a stock-for-stock transaction worth $822 million and the programmable switch manufacturer Summa Four was acquired by San Jose, Calif.- based Cisco Systems Inc. [CSCO] for about $116 million.

The acquisitions, though vastly different in monetary value, have much in common. Stratus is a more traditional IN vendor that has experienced success in both the wireline and wireless markets. Not so traditional, but still capable if executing IN services, the programmable switches sold by Summa Four to value-added resellers have also worked their way into wireline and wirless markets, though programmable switches are much popular with smaller, start-up telcos.

Both Ascend and Cisco share similar goals for acquiring the companies: To unlock the door that will enable their data technologies to enter the voice world through the most logical route possible - the SS7 network.

The Insatiable Cisco

Summa Four is the fifth company by Cisco this year. Since 1993, Cisco has aquired 23 companies. "It appears they're acquiring as many companies that they can to get into the public network space," Dan Taylor, an analyst with the Boston-based Aberdeen Group sys. "They're trying to get more and more products that they can sell to carriers."

And lately, Cisco has benn a hard suitor to turn away. Growing demand for networking equipment helped drive its quarterly profits up 36 percent. For the quarter that ended July 25, Cisco reported profits of $522.8 million, or 48 cents a share, up from $383.2 million, or 37 cents a share, a year earlier. Revenues increased 35 percent to $2.39 billion from $1.77 billion. Cisco closed it fiscal year with revenues of nearly $8.5 million, an increase of 31 percent over the previous year (see chart below).

4Q Cisco Performance

Source: Cisco

What Cisco wants, according to sources, is a way to tie its Internet protocol (IP) products into the more deeply established carrier voice networks. Summa's programmable switch technology can accomplish this by acting as a protocol translator.

"The big, big market is upgrading telco networks to handle [data] packets," says Herbet Jackson, an analyst at the venture capital fund Renaissance Ventures, L.C.C., which is based in Richmond, Va., and is affiliated with groups who are shareholder of Summa Four stock. "What Cisco bought was a platform that tries IP systems with Legacy systems. That was the hole in [Cisco's] portfolio, that was the missing ingredient."

Bad News For Excel?

The acquisition of Summa Four may impose a sense of urgency on its long-time rival and fellow programmable switch vendor Hyannis, Mass.-based Excel Switching Corp. [XLSW]. "It just puts pressure on them," Jackson says. "Excel needs an ally."

But Excel could not agree less. "Adding in IP transport, or packet transportation, is easy for us- we're already packet-based," counters Rick Rotondo, manager of Excel's wireless business unit. "They [Summa Four] just were not competitive in the open programmable switch market. Summa went for a 'parts car' price, they're not a fuctioning company."

Summa, on the other hand, views the acquisition not as a way to bail out of a sinking ship, but as a pivotal competitive move. "Cisco looked at all the players in the programmable switch market and chose Summa Four on the strength of our products," says Peter Carlino, director of business development at Summa Four. "We are certainly going to be a very formidable competitor. [The acquisition] really enhances our voice over IP capabilities, needless to say, and creates a larger addressable market."

Although Summa will be wholly subsumed by Cisco, its President and CEO Bob Degan will stay and run the Summa Four business unit at Cisco.

Stratus Gives Ascend The Power Of SS7

Of the four business units that make up Stratus, Ascend is really only interested in keeping one, the telecom carrier unti. The other units, which include an Enterprise computer business and two business units that create financial and Enterprise software, will be set up as separate subsidaries and then divested before the end of 1998.

Stratus' telecom carrier unit includes SS7 switches, operations support systems (OSS) software and fault-tolerant platforms. "Our products, combined with Stratus SS7 switches, OSS software and fault-tolerant platform, allow network service providers cost-effective, reliable and transparent means to relieve congestion while reducing operating costs on the public switched telephone network, facilitate the integration of voice, fax and data traffic networks through multi-service ATM switches, and provide new services to end-users, such as Internet telephony, fax and voice over IP, utilizing remote access switches," Mory Ejabat, Ascend's president and CEO says, summarizing how Stratus will be utilized.

Ascends' interest right now, says Ali Kafel, director of telecom marketing at Stratus, is with SS7. "They see themselves as developing the new data network of the future. It's similar to the statement Cisco's made." Kafel remarks. "These guys clearly see that they have to be a major player in the intelligent network space. And that is not something that they know today."

Although Stratus seems pleased with the acquisition, financial difficulties in the company's second quarter caused, in large part, by problems in Asian markets, may have had a role in the decision-making process. In the second quarter, Stratus reported a $10 million loss. Revenues for that quarter totaled $134.3 million compared to $167.6 million for the same quarter a year ago. About 40 percent of Stratus' revenues come from sales to Japan and other Asian countries. (Bernie Schneider, Ascend, 510/747-2618; Angela Hessy, Cisco,408/525-6353; Rick Rotondo, Excel, 508/862-3000; Nancy Leonard, Stratus, 508/490-6932; Peter Carlino, Summa Four, 603/625-4050, ext. 2276.)



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