Nortel to Acquire Bay Networks in $7.27-Billion Deal

Northern Telecom, North America’s No. 2 telephone equipment maker, agreed to buy Bay Networks, the No. 3 maker of networking products, for $7.27 billion in stock.

Santa Clara-based Bay makes equipment that connects computers to corporate networks and the Internet, competing against Cisco Systems Inc. and 3Com Corp. As its larger rivals shipped newer products, sales of Bay’s older gear plunged this year and fierce price competition has cut into its profits.

“There’s a concern [Nortel is] paying a premium for a second-rate company,” said Andrew Martyn, a portfolio manager at the investment management firm Davis-Rea, which owns more than 3 million shares of Nortel’s parent, BCE Inc.

Canada-based Nortel will exchange 0.6 share for each Bay share, valuing Bay at $32 a share based on Nortel’s Monday close of $54 on the New York Stock Exchange. Shares of Nortel--51% owned by BCE, Canada’s biggest telecommunications company--dropped $9.69.

After the transaction is completed, BCE’s stake will shrink to 41%, while Bay shareholders will own 21% of the combined company.

Bay Networks shares rose $2.44 to close at $30.75 on the NYSE.

For its fiscal third quarter ended in March, Bay’s revenue fell 15% to $547.2 million from $644.9 million in the December quarter. Profit before charges slipped to $9.9 million, or 4 cents a diluted share, in the quarter ended March 28, from $20.7 million, or 10 cents, a year earlier.