Posted: 10/1999

Lucent on Buying Spree; Acquires INS, Excel,
Xedia
By Ken Branson

Lucent Technologies Inc., continues to exchange its stock and cash for intellectual
property, brains and customers. In August alone, the Murray Hill, N.J.-based big-box maker
announced its intention to acquire a professional services firm, International Network
Services Inc. (INS), Sunnyvale, Calif., for $3.7 billion; a rival switch maker, Excel
Switching Corp., Hyannis, Mass., for $1.7 billion; and an Internet protocol (IP)-based
virtual private network (VPN) company, Xedia Corp., Acton, Mass., for $246 million.

Lucent executives, quizzed about their acquisition strategy, reply that they don’t have
an acquisition strategy; they have a business strategy, they say, and acquisition is one
way to fulfill it. Lucent seems to be especially active in Massachusetts, where, in
addition to INS, Excel and Xedia, they have acquired Kenan Systems Corp., Cambridge, a
billing software company.

"What they’re really buying, Kenan aside, is top-flight engineering," says
Robert Rosenberg, chairman of Insight Research Corp., Parsippany, N.J. "They are
using that, essentially, to further drive their own internal engineering folks in a
certain direction, or quicken time to market with some key patents. When they get these
little companies, they’re getting patents."

For Lucent’s prime competitors, the goal of finding "top-flight engineering"
and filling in competency gaps is the same, but the methods have been different. Cisco
Systems Inc., San Jose, Calif., has made its share of acquisitions as it begins to grow
from its origins as a router maker. Indeed, Cisco recently announced its entry into the
optical transport business with the pending acquisitions of Cerent Corp., Petaluma,
Calif., and Monterey Networks Inc., Richardson, Texas, for a combined $7.4 billion in
stock. Cisco also made a foray into the professional services arena by announcing its
intention to invest $1 billion in the Internet services business of KPMG LLP, New York.
Under the agreement, KMPG is to hire 4,000 Internet integrators over the next 18 months.
Cisco’s sales force is to find customers–carriers and enterprises–for which those new
KPMG hires will develop integrated, Internet-based services.

This unabashed tie-in between KPMG’s Internet-related professional services and Cisco’s
products may give some customers a bad moment or two when they consider hiring KPMG for
such services.

"If you’re the network operations guy (at a carrier), you might say to yourself,
well, gosh, are they (KPMG) as disinterested as they once were?" Rosenberg says.

But the custom of tying professional services to one’s products is unlikely to shock
such "operations guys" for long. Nortel Networks, Richardson, Texas, insists on
some "investment" in its products from a carrier before its offers its
professional services, according to Mark Dill, Nortel’s vice president of market
development.

"We’re refining business model, but at this point, we absolutely require a certain
level of investment in Nortel products before we offer the services," Dill says.

INS will be part of the Lucent NetCare organization, which is itself only about a month
old, having been formed from disparate parts of Lucent to handle what Patricia Russo,
Lucent’s vice president-strategic planning and corporate operations, describes as
"services and support for next-generation networks." Russo and her colleagues
often have said that Lucent intends to lead the way to next-generation networks by
providing "the four S’s: systems, software, silicon and services." INS, she
says, fills some gaps in the services category, particularly with IP expertise.

INS, founded in 1991 and a public company since 1996, provides network consulting and
software to its enterprise and service provider customers. Its customers range from the
school district in Simsbury, Conn., for which it designed and implemented a computer
network, to the Hong Kong Airport Authority, for the new airport for which INS configured
switches and hubs.

Russo and INS CEO John Drew point out that Lucent’s NetCare organization and INS have a
similar revenue mix–"55 [percent] to 60 percent enterprise; 40 [percent] to 45
percent service provider," Drew says. INS, in its most recent quarter, counted 43
percent of its revenue from service providers, which Drew says is a 162 percent
year-over-year increase.

Much of that increase, he says, comes from new service providers. "Clearly, the
service provider segment, with the proliferation of new service providers, and the need
for help, is growing more rapidly," Russo says. Drew says he expects the revenue mix
to be 50/50 in the next 12 to 18 months.