ANTICIPATION OF SURGING INTERNET TRAFFIC DROVE ACQUISITIONS IN THE HARDWARE INDUSTRY.

Anticipation of surging Internet traffic comprising data, wireline and wireless voice and video led to unprecedented demand for bandwith, powering M&A activity in 1999. This market development makes a high-performance, all-optical Internet essential while spurring M&A activity to new levels, according to the Technology M&A Report: Full Year 1999, from Broadview Intl. LLC.

The value of hardware deals worldwide grew 128 percent from $72.7 billion in 1998 to $165.5 billion in 1999, while the number of deals in this sector rose 30 percent from 542 transactions in 1998 to 704 transactions in 1999. In North America, the value of hardware deals jumped 147 percent from $52.9 billion in 1998 to $130.9 billion in 1999.

"The surge in Internet traffic led by consumers and businesses makes a high-performance, all-optical Internet essential, and M&A is the only way for the leading infrastructure vendors to acquire technology rapidly enough to remain competitive," says Paul Deninger, chairman and CEO of Broadview Holdings LLP. "At the same time that the Internet is revolutionizing the way we work and communicate, it is transforming itself and the companies laying the pipes."

The fact that standards and R&D efforts remained rooted in midair didn't discourage companies seeking to be the dominant providers of next-generation Internet solutions from making 1999 the year of multimillion dollar acquisitions of zero-revenue start-ups, particularly in the optical networking equipment arena. Urgent limits on time-to-market propelled market leaders to accelerate acquisitions of companies in the center of this red-hot market, as seen by Cisco's $7.3 billion acquisition of Cerent and Nortel's $3.3 billion bid for Qtera.

With upstarts such as Juniper Networks, Sycamore Networks, Copper Mountain Networks and Redback Networks launching explosive IPOs, the need to preempt the lure of an IPO - and lay out the welcome mat to other prime privately held companies - contributed to the sizeable premiums paid in these and other deals. Cerent, for example, had posted only $10 million in sales in its two and a half years in business and had yet to turn a profit at the time Cisco made its bid.

The Internet's dramatic impact is sharply reflected in North American M&A activity in the components segment, which saw a 41 percent increase in value from $18.6 billion in 1998 to $26.2 billion in 1999, while deal volume rose 26 percent over 1998 from 80 to 101 deals. Multiple large-scale acquisitions by Intel and Texas Instruments were aimed at adding technology expertise and market access in wireline and wireless communications applications. Illustrative deals include Intel's acquisitions of Level One Communications, a high-speed telecom and networking chip supplier, for $2.2 billion; DSP Communications, a leading supplier of chips for digital cellular phones, for $1.6 billion; Dialogic, a supplier of computer telephony products, for $780 million; and Softcom Microsystems, a maker of high-end networking chips and hardware, for $150 million.

Behind the surge is a "virtuous circle" driven by the Internet. Booming traffic is driving demand for a faster network infrastructure. Accordingly, feverish activity in optical networking spurred large-scale consolidation in the heart of the industry - optical components - as seen by the "merger of equals" involving JDS Fitel and Uniphase, valued at $3.2 billion, followed later in the year by the new entity, JDS Uniphase, making its pending acquisition of OCLI for $2.8 billion. This was also seen in ADC Telecommunications' acquisition of Spectracom in a deal valued at up to $105 million and foreshadowed the consolidation reflected in the recent bid by JDS Uniphase for rival E-TEK Dynamics in an all-stock deal worth potentially $15 billion.

The same demand for bandwidth and access fueled continued expansion among communications equipment companies. This was seen in Cisco's $125 million acquisition of privately held circuit-to-packet-based switch vendor Sentient Networks, as well as in Lucent's acquisition of publicly traded Excel Switching, a carrier-class open-switching platform provider, for $1.3 billion. Reflecting this demand, carrier equipment saw a 631 percent increase in value from $7.9 billion in 1998 to $58.0 billion in 1999 in North America, with the number of deals up 50 percent from 40 in 1998 to 60 in 1999.