Investors dumped Corning Inc.'s highflying stock Monday on a report that Corning is in talks for a colossal deal to buy Nortel Networks Corp.'s optical-parts unit that serves the Internet industry--but in a way that would give Nortel more than half of Corning's stock.
Investors made their displeasure--or their confusion--immediately clear over the possible deal. Corning stock, which before Monday had nearly quadrupled in price over the previous 12 months, plummeted $36.25 a share, to $247, while Nortel inched up 25 cents, to $81.50 a share, both in composite trading on the New York Stock Exchange.
Whether the purported $100-billion stock swap is completed--and both companies declined to comment Monday on the report--there is a race among companies such as Corning to expand the array of fiber optics, lasers and other exotic transmission components that they can sell to the exploding Internet and telecommunications industries.
This month, Corning was edged out by JDS Uniphase Corp.'s bid to acquire SDL Inc., a maker of lasers and other gear for fiber-optic communications systems, for about $36 billion in stock.
At the same time, both Corning and Nortel--one of Canada's biggest telecommunications and technology companies--have been undergoing transformations of their own to adapt to the burgeoning Internet.
Corning, a 149-year-old company once familiar to consumers for its cooking glassware, turned itself into one of the world's leading makers of fiber-optic cable in the 1990s. It also makes the lasers, filters and other components that shoot beams of light at blinding speeds through the networks of hair-thin fiber-optic lines that make Internet and telecommunications connections possible.
Nortel, in turn, is working to change its role as a purveyor of conventional telephone equipment into one that sells cutting-edge Internet networking systems. That's why it bought Bay Networks, a Santa Clara maker of Internet gear, for $7 billion in 1998.
However, Nortel--which was called Northern Telecom Ltd. until last year--also has indicated that it's looking for ways to fetch more value for its optical-parts lines, which is the impetus behind its talks with Corning, the Wall Street Journal reported Monday.
Yet the deal is fraught with complications, mostly that it would involve an exchange of stock that would give Nortel more than 50% of Corning's shares--even though Corning would be purchasing the Nortel division and would stay independent, the report said. It's not clear how those complexities could be resolved, and no specific terms were disclosed.
"It could be a problem that Corning shareholders would have less than 50% ownership," said Lawrence Harris, analyst with Josephthal & Co. in New York. "I would evaluate the possibility of such a transaction occurring at less than 50-50."
Ironically, Nortel is among the major telecommunications-equipment suppliers that buy many of their fiber-optic goods and other components from Corning. And Corning spokesman Robert DeMallie said that while the Corning, N.Y.-based company wants to expand its product line in components, it has no intention of recasting itself into a full-fledged competitor of complete network systems such as Nortel, Lucent Technologies Inc. and their peers.
"We want to provide our customers with the technology they want and need, but . . . it is not our intention to migrate up the chain," he said.
Corning's recent acquisitions have been small relative to the reported deal with Nortel. In recent quarters Corning had used its rich stock to make several acquisitions of $2 billion or less apiece, including NetOptix Corp., Oak Industries Inc. and the optical-cable lines of German electronics giant Siemens.
And the reported $100-billion price tag for Nortel's optical-products line seems astronomical compared with the unit's estimated annual sales of $1 billion. (Nortel's total 1999 revenue was $21.3 billion.) Indeed, five years ago Corning likely could have bought Nortel outright for less than $5 billion.
But the Internet changed all that, and it's driven Nortel's stock price soaring in recent years as well. Demand from users of Internet equipment is expected to keep soaring, and users of fiber-optic components say there's already a shortage of component supplies because demand is so high.
In fact, Nortel announced Monday that it will spend $1.9 billion to double its production capacity for optical-based Internet components over the next 18 months to "meet explosive customer demand." Nortel expects its optical-Internet division to post revenue of $2.5 billion this year--triple that of last year.
That operation is a major piece of what Corning would buy if any deal is completed. But there was no mention of Corning in the announcement by Nortel, based in Brampton, Ontario. "This investment reflects our determination to lead the optical components and systems market well into the future," Nortel Chief Executive John Roth said in a statement.
Lucent, meantime, recently announced plans to spin off its microelectronics group--which makes optical-fiber components, semiconductors and other items--because it expects the group to better flourish in that environment on its own. Lucent's group had about $5.4 billion in sales last year.
That spinoff would leave Nortel as the logical option if Corning does want to acquire a big components producer, some analysts said. "The price tag seems high, but the strategic impact [makes it] imperative for Corning to purchase one of those two divisions," said Brian Miller, an analyst at Invesco Funds Group Inc.
Bloomberg News contributed to this report.