TECH TALK
By Paul Motter (TMF DotCom)

NEW YORK, NY (June 12, 1997) -- Shares of ASCEND COMMUNICATIONS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> got clobbered this week. It all started on Tuesday when UBS Securities Inc. lowered its investment rating on Ascend to "hold" from "buy," saying the company "may be faced with material financial obligation in upgrading existing customers to workable 56 kbps modem cards for the MAX and TNT units." The analyst at UBS wasn't sure if this is a problem, so he put the shares on hold for the time being.

Then came what I believe to be a somewhat inexplicable comment from Joseph Noel, an analyst at Hambrecht & Quist Inc., who said in reference to CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %> and Ascend, "You've got two companies that are broken." Putting the two makers of networking equipment together "doesn't really excite anybody." he added.

The question in my mind is, "If the Ascend/Cascade marriage doesn't excite anybody, what would?" The most obvious parallel to draw upon in the networking sector right now is the 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>/US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %> merger. These are both fine companies, soon to be united under the 3Com banner, an excellent investment for the long term, so I am not trying to denigrate here, but why the double standard? Excitement for 3Com/US Robotics but not for Ascend/Cascade? The stock performance by 3Com/US Robotics seems exciting enough.

What does the 3Com/US Robotics merger have that Ascend/Cascade doesn't have? At first blush the obvious answer would be that US Robotics has been shipping its 56k modem for three-and-a-half months now while Ascend just managed to get theirs out the door. That is a true advantage short-term, but I am not here to talk about short-term. I am here to look at the big picture.

What will the 3Com/US Robotics merger bring about? It will link a modem maker and a networking equipment manufacturer. Their products cover the local area network and the edge of the network, where the LAN meets the wide area network. Both US Robotics and 3Com make remote access so it is fair to say there is overlap there (the opposite of synergy), which in terms of merging a company, is not really a good thing.

3Com's primary business has been high profit-margin NICs for quite awhile now, but those margins are eroding quickly as the competition heats up. The networking world is making the transition from investing in departmental resources towards building up bandwidth in the backbone. However, the US Robotics acquisiton adds nothing to this market since their products do nothing to enhance 3Com's market position inside the larger public networks. The merger with US Robotics adds more power in the retail sales channel, but what 3Com really needs is more sales exposure in the enterprise channel, the area where specialized equipment involving trained installers and operators is paramount. Once again we have a case of overlap rather than synergy in the 3Com/US Robotics merger.

Case in point... the ability to compete with CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. The enterprise market is currently Cisco's domain. 3Com is most likely to become a bigger supplier to small offices in the direct sales channel, and, as a result of the US Robotics merger, could very well lose market share in the enterprise market where touchy-feely sales support is more important.

The emerging technologies that 3Com was just beginning to establish a presence in, ATM for example, have nothing to gain from the US Robotics influx. In fact, a recent acquisition of US Robotics, the Israeli-based Skorpios ATM technology for which they devastatingly depleted their cash reserves, will likely end up on the scrap heap as 3Com has its ATM technology in a solid implementation already under deployment. It wasn't ATM technology 3Com needed, it was the sales and technical support in the field.

With its recent acquisition of Stratacom, Cisco has entered the public data network with a vengeance, offering ATM and frame relay switches to complement their line of routers. Just before the Stratacom takeover, Stratacom's chief rival was Cascade, and to the best of my recollection, Cascade was kicking butt. Cisco competes on some levels with 3Com, but mostly in the world of hubs and LAN switches. In that rivalry, 3Com has usually won the hub market and Cisco has dominated the switches. But Cisco has many more areas that 3Com can't compete in, routers for example. Routers and enterprise network switches are the staple of Cisco's business, and the company about to give them a run for their money there is none other than Ascend/Cascade.

Ascend has the GRF400, a fast switch that can switch traffic at up to 10 million packets per second whereas conventional routers only do 500,000. Cisco claims to have an answer to this, tag switching, but it isn't out yet and a release date hasn't been set. GRF is already adding to Ascend's bottom line and its contribution is increasing quarterly. Then we add in Cascade's ATM and frame relay products. Cascade's ATM and frame relay products and sales channels add to Ascend's ability to offer true end-to-end solutions, an area 3Com/US Robotics doesn't reach now and doesn't look likely to reach anytime soon.

The product lines for Ascend and Cascade have real synergy, i.e., they complement each other with very little overlap. Ascend's strength is its postion at the edge of the network (they are a formidable competitor to US Robotics for remote access concentrators) while Cascade's strength is in the enterprise equipment that Ascend devices connect to -- frame relay and ATM, where they will compete directly with Cisco.

The Ascend/Cascade merger has true synergy and it is poised to take on the 800-pound gorilla Cisco. You cannot say "synergy" in reference to 3Com/US Robotics, you do not connect a modem to a hub, and it will not compete with Cisco anytime soon except in the world of hubs and switches, hardly Cisco's core business. So why is 3Com/USR exciting and Ascend/Cascade not? Beats me.

NOTE: In last week's Tech Talk I mistakenly gave the impression that BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> had warned the Street that it may not make its estimated earnings for the quarter. This was my mistake based on the warning by CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> about their earnings for the coming quarter and the subsequent downgrade of both Cabletron and Bay Networks by various analysts. I apologize for the confusion.

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