Two of the biggest players in a hot computer industry niche agreed to join forces Tuesday as Wellfleet Communications announced that it will acquire Santa Clara, Calif.-based SynOptics Communications in a stock swap valued at about $1 billion.
The merger would create a dominant new player in the computer networking business, which has grown explosively in recent years as corporations move away from large mainframe computers to flexible networks of smaller machines.
For the two companies, the combination would fill large gaps in their product lines and allow them to keep up with demand for ever-more-sophisticated computer networks, industry analysts said.
But the merger received a cold reception on Wall Street, where shares of both companies plunged. And analysts noted that high-technology mergers are often difficult to manage.
"To merge the companies (and their product lines) while keeping up with the competition is difficult," said Roxane Googin, a computer systems and software analyst at Gruntal & Co.
Wellfleet and SynOptics have both ridden the boom in the computer network equipment business, which is expected to grow from an estimated $4.6 billion in sales this year to $10.3 billion by 1998, according to the market research firm Dataquest.
Investors in SynOptics, whose products link personal computer users into a network, have seen their stock rise from $2.25 in 1988, when the company went public, to nearly $40 last year. The company employs about 1,200 people in the Bay Area.
Wellfleet, based in Billerica, Mass., sells equipment that allows the exchange of information between computer groups. It is the second-largest company of its kind and is often cited as the type of firm that will help the Boston area regain its strength in high-technology. Under the merger agreement, each SynOptics share will be exchanged for 0.725 shares of Wellfleet stock.
Shareholders of the two companies were not enthused. Wellfleet shares plunged $5.19 to $20.06 on Tuesday in heavy Nasdaq trading. SynOptics stock dropped $1.125 to $14.625 on Nasdaq.
But company executives and some industry observers say the merger is essential. Both Wellfleet and SynOptics have fallen behind competitors that have been able to offer a wider variety of products, many of which were acquired by buying up smaller firms.
Meanwhile, two other larger equipment makers, Cabletron Systems and Cisco Systems, announced a strategic alliance that analysts said represented a major threat to Wellfleet and SynOptics.
Wellfleet President Paul Severino will become chairman of the combined companies. SynOptics President and Chief Executive Andrew K. Ludwick will serve in the same roles at the new company.