Chapter 14 - Internetworking: Emergence 1985-1988
14.14 Network Equipment Technologies
Many management teams might have rested on their laurels after a year like 1987 that NET management reeled in: becoming a public company in January, signing a major agreement with IBM in June and growing sales from $47.4 million for fiscal year ending March 1987 to $90.6 million for 1988. But not the team Bruce Smith and the other founders had assembled. No, they dreamed of NET as one day being a Fortune 500 corporation now in the very early stages of its history. One way was to listen to customers and anticipate their needs. So when Smith, Audrey Maclean and Tony Russo, Vice President of Marketing, who routinely traveled to meet with their customers, sensed that while having acquired ComDesign helped customers building out their data communication networks, a new, maybe even more important, market force required attention: the need to interconnect LANs with their WANs. Having little LAN expertise in-house, and little time to master it, the logical conclusion was to acquire a LAN company. Fortunately, a prime candidate was conveniently headquartered a few miles down the road in San Jose, CA: Excelan.
Excelan, a public company since February 1987 and growing rapidly, had yet to create the organizational depth needed to tackle the larger opportunity of selling directly to large corporations, organizational resources NET was amassing? That said, Excelan did have the high-performance Ethernet products and TCP/IP protocols NET management heard customers wanting. So when NET management came calling, the conversations proceeded quickly. From Excelan’s perspective, and unknown to NET management at the time, the sudden arrival of NET held the prospect of solving a problem of company leadership the Board was facing. The CEO the Board had hired to facilitate the February IPO, Dick Moore, had lost their confidence and replacing him seemed fraught with risks. So NET arrived like a “white knight.”
On April 13, 1987 the companies announced Excelan would merge into NET. When the transaction was completed in July, NET would be giving stock valued at an estimated $119.4 million to the shareholders of Excelan, or about 30% of the value of the combined companies.71 It was a blockbuster of a merger and left little doubt about what corporations wanted: seamless interconnectivity of their LANs and WANs.
After the merger was announced, however, the Excelan Board was faced with the crisis they had hoped to avoid. Kanwal Rekhi, then Executive Vice President and Director remembers:
After the merger was announced, Moore left, anyhow. And, so I became the CEO again, the second time. The first thing I told the board, if they do that merger, I’m done the day after the merger, because I don’t think this merger made sense. I said every time I looked at them, their way of doing business, it just doesn’t smell right to me. And one of the board members came up to me, and said: ‘If you don’t want the merger we won’t do it.’ So we didn’t do the merger. And the board members were very happy in the end.72
On May 16, NET claimed Excelan was in breach of its obligations under their merger agreement. On June 28, the companies announced the merger was “terminated by mutual consent”. The public documents left unclear what the breach was, only that efforts to renegotiate had failed.72
While the merger proved unsuccessful, it had a lasting impact on both corporations; impacts that would unravel them in both obvious and unsuspecting ways despite both turning in great years for 1988. NET’s sales rose to $136 million, up an impressive 50%. Excelan’s sales rose even more impressively to $65.9 million, up 69%. Clearly the markets for communications products remained robust even as the pressure for market consolidation continued.