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Wednesday February 23 6:03 PM ET Alcatel Buys Newbridge to Boost Position By Susan Taylor OTTAWA (Reuters) – It was a long dance, but Alcatel (CGEP.PA) on Wednesday finally won Newbridge Networks Corp.(Toronto:NNC.TO – news) in a $7.1 billion deal that will give the French telecoms equipment maker a more solid footing in the United States. Alcatel, which launched takeover negotiations four months ago with Canada’s Newbridge, said on Wednesday it had struck an all-stock deal to exchange 0.81 of an Alcatel American Depositary Share for each Newbridge common share. Alcatel will issue about 35 million shares, equivalent to 17.6 percent of its current capital, to finance the acquisition. Shareholder approval is still pending for the merger, which is expected to close in late May or early June. The much anticipated takeover comes after Newbridge said in November it was open to offers following its sixth earnings warning in 10 quarters. At one time, Newbridge was speaking to five companies, President and COO Pearse Flynn told Reuters. Newbridge hit the selling block as acquisition-hungry Alcatel was looking to expand its product line and gain a better foothold in the rich U.S. market. Last September, Alcatel struck its fifth U.S. purchase in 12 months. “The clear objective is to position Alcatel among the top three players worldwide,” said Alcatel Chief Executive Serge Tchuruk in a conference call on Wednesday. “We believe that this is the right time to do this deal.” Alcatel, which has more than half the global market for asymmetric digital subscriber line (ADSL) technology for high-speed Internet access, said its combination with Newbridge allows it to take on network giants Lucent Technologies Inc. (NYSE:LU – news), Nortel Networks Corp. (Toronto:NT.TO – news)(NYSE:NT – news), and Cisco Systems Inc. (NasdaqNM:CSCO – news) An explosion of network traffic, fueled largely by burgeoning use of the Internet, is increasing demand for network equipment. In turn, that is triggering increased spending by Alcatel customers on asynchronous transfer mode technology — Newbridge’s flagship equipment, Tchuruk said. “We want to make sure that we’re there with not just our access equipment — but also the switching and the core equipment that goes behind it,” said Alcatel Chief Operating Officer Krish Prabhu in an interview with Reuters. Newbridge has a 23-percent share of the world market for ATM equipment, which transmits multimedia data at high speeds across large networks. It bolstered that position with its December release of the world’s highest-capacity ATM switch. Newbridge, which released record third-quarter revenues of C$521 million on Wednesday morning, said it is now seeing the benefits of new product releases from recent acquisitions and internal development efforts. In 2000, Alcatel said Newbridge will contribute operating income of $160 million, which includes $50 million in savings. In 2001, Newbridge contributes operating income of $430 million, including $150 million in savings. The two firms now face the task of merging operations. A new division, which will be based in Newbridge’s Ottawa-area headquarters and led by Flynn, is expected to have proforma annual sales of more than $2.5 billion. The combination brings to Alcatel such benefits as greater credibility and larger market presence, said Paul Sagawa, analyst at Sanford Bernstein & Co. in New York. “However, there are always going to be integration issues — particularly with a company with a culture as strong as Newbridge.” Newbridge founder and CEO Terry Matthews — who owns 22 percent of the company — will not remain an employee with Alcatel beyond the transition, though there has been no decision if he will hold any other titles, such as director. “I will enjoy very much…growing complementary technology companies on the one hand, and the other hand in working particularly with Krish and Pearse in raising the company’s profile in North America,” said Matthews during the conference call. The purchase also includes Newbridge’s stake in a string of affiliate companies including CrossKeys Systems Corp. (Toronto:CKY.TO – news), which makes network management software, and Tundra Semiconductor Corp. (Toronto:TUN.TO – news) Alcatel said it expects annual cost savings of $220 million by 2003 from overlap cuts, economies-of-scale and margin improvements from the elimination of some channel partners. Few job cuts are expected, Flynn said. Newbridge shares fell C$2.60 on the Toronto Stock Exchange to end at C$48.00 in heavy trade of nearly 15 million shares on Wednesday, while on New York the issue dipped 2 3/16 to 32 13/16 on 13.7 million shares. Alcatel stock lost 8.63 on the Paris bourse to end trade at 217 euros. ($1-$1.46 Canadian)