SAN FRANCISCO (03/15/2000) - Nortel Networks Corp. bought closely held optical networking company Xros Inc. (pronounced Kai-ros) today for $3.25 billion. The acquisition will help Nortel, the leading supplier of optical networking gear, increase the capacity its switches and other routing gear can handle.
That ability will be increasingly important, as more and more carriers turn to optical gear to increase the capacity of their networks.
"At the rate people are coming on the Net, the trends towards broadband, the bigger file sizes people are sending to each other, there's some big numbers, some big multipliers," says Nortel CEO John Roth. "We're going to see at least 400 percent increases over the next 3 years."
Xros' technology is designed to operate at today's industry standard, 10 Gigabits per second, as well as the future speeds of 40Gbps and 80Gbps, capabilities that Nortel Networks has announced its optical networks will be able to carry next year. According to Xros, the company's switch has been in the works for 5 years. Xros, which was funded entirely with venture capital, has yet to realize any revenues, although Nortel expects it will do so by 2001.
In December, Nortel agreed to buy optical-networking startup Qtera for $3.25 billion in stock. Qtera gave the company the ability to manage distortion on optical networks, among other things, so customers need less equipment to manage the problems associated with packet loss.
Nortel has done very well for itself of late. Largely as a result of its optical networking prowess, Nortel's market capitalization surpassed that of Lucent earlier this year. That made it the second largest equipment maker after Cisco. Lucent, Cisco and JDS Uniphase have all made aggressive acquisitions in recent months; Lucent spent $2.95 billion on Ortel just last month. Even as telecommunications companies clamor for optical networking equipment, Nortel has been cutting prices.
According to Roth, no matter how far demand outstrips supply, it's bad form to overcharge your customers when you can't meet their needs. Plus, Nortel wants to make it tough for competitors to bring low-priced alternatives to market.
Nortel expects to step up its pace of acquisitions this year. In January, the company announced that Bell Canada Enterprises, or BCE, will distribute 36 percent of its holdings in Nortel Networks to its common shareholders.
According to Roth, putting more of the company's stock on the market will make it easier to finance acquisitions. "When we acquired Bay [in June 1998], only 40 percent of our stock was in float," he explains. "We spent 27 percent of our market capitalization to finance the acquisition, but it felt like we were spending 60 percent, because so much of our market cap was tied up in BCE."