FAIT ACCOMPLI; FRENCH TELECOM BEHEMOTH ALCATEL CONFIRMS ITS ACQUISITION OF XYLAN.

Byline: Ben Sullivan Daily News Staff Writer

The rumors are finally right: Xylan Corp. is being bought.

French telecommunications giant Alcatel SA said Tuesday it will pay nearly $2 billion for the Calabasas-based maker of network switching equipment, ending months of speculation over Xylan's future.

The Calabasas company had been a rumored takeover target for more than 18 months, with Paris-based Alcatel always considered a likely bidder. The reason: The Internet. Amid slowing sales of its voice equipment, the Xylan purchase will boost Alcatel's position as an equipment supplier to telephone companies looking to become or expand their roles as Internet service providers, and to large corporations with growing data networks.

``This is something Alcatel really needed,'' said analyst Marc Woodward at Battery Ventures in San Mateo.

Indeed, Alcatel's dearth of in-house products in the data network arena has been an albatross around its neck. Due in part to the Internet business it lost to competitors last year, the company was forced in September to announce it would miss earnings estimates, sending the firm's share price into a nose dive that erased 38 percent of its value in a single day.

The company tried to make do by buying from a variety of hardware suppliers including Ascend Communications, Cisco Systems, Xylan and others. But as several of those companies were themselves bought by Alcatel competitors, the field of potential dance partners quickly narrowed.

Cash-rich after a three-year reorganization that saw it sell off $4.7 billion worth of assets, Alcatel last year began a shopping spree which, even with the Xylan deal, does not appear to be over. It paid $4.4 billion in stock for DSC Communications Corp. of Plano, Texas, beefing up its U.S. sales team and adding several North American clients. And in December it bought Packet Engines Inc., a computer-networking company based in Spokane, Wash., for $315 million cash.

The January purchase of Ascend, the No. 4 network equipment maker, by Lucent Technologies for $20 billion added extra urgency to the situation, and may have been what prompted Alcatel to move on Xylan now.

Already owning 6.5 percent of Xylan from a 1995 deal - and accounting for more than 12 percent of the smaller firm's fourth quarter sales - Alcatel offered the company $37 per share for its remaining stock and stock options, a 37 percent premium over the issue's closing price Monday. Xylan shares had already risen nearly 40 percent in recent weeks on speculation that some sort of deal was in the works, and the issue closed up $8.8125 Tuesday at $35.75, a one-day gain of 32.7 percent.

Alcatel chairman Serge Tchuruk said on Tuesday that his firm would likely buy another company by week's end. He declined to say which firm was being considered, but said it would provide Alcatel with the ability to link mobile computers to local networks.

``The world of communications and networking is undergoing fundamental changes,'' Olivier Houssin, executive vice president of Alcatel Telecom, said in explaining the flood of recent deals. ``Voice and data are converging. The new world will not contain voice companies and data companies. It will only contain information companies.''

In addition to helping round out Alcatel's bullpen, Tuesday's proposed purchase, which must still be approved by regulators on both sides of the Atlantic, is seen as a plus for Xylan, too. The company, which will remain a wholly-owned subsidiary of Alcatel, was already being overshadowed by larger players such as Cisco and Ascend, a trend that would likely have continued without a large parent to back it up.

``In the face of industry giants, Xylan has grown beyond anyone's expectations,'' Chairman and chief executive Steve Kim said Tuesday. Still, Kim said, he had been frustrated because even as its sales grew, the company's stock price until very recently did not.

``Today's investors are favoring the large companies,'' Kim told the Associated Press. ``They see us as still small.''

CAPTION(S):

Photo, Chart

PHOTO (Color) Calabasas-based maker of network switching systems Xylan was a rumored takeover target for more than 18 months.

John McCoy/Daily News

CHART: STRONG MONTH

Shares of Calabasas-based Xylan Corp. nearly doubled from mid-February to Tuesday.