Bay’s Shares Gain 16% After NorTel Rejected

Bay Networks Inc. shares rose 16% on Wednesday after the company told analysts it rejected an acquisition offer from Northern Telecom Ltd. as too low but would consider higher bids.

Bay stock rose $3.94 to close at $27.94 after earlier touching $28.56. NorTel shares fell $1.25 to $63.56. Both trade on the New York Stock Exchange.

NorTel, like other telephone-equipment makers such as Lucent Technologies Inc., Alcatel Alsthom and Ericsson, is looking to buy networking companies to expand its share of the fast-growing Internet market. Acquiring Santa Clara-based Bay would give those companies products and distribution channels aimed at large businesses, which they now lack.

“All of the phone-equipment giants are looking at data companies like Bay,” said Craig Johnson, an analyst with the Pita Group in Portland, Ore.

Spokesmen for both Bay and Northern Telecom declined to comment Wednesday on any possible acquisition offers.

Bay Networks Chief Executive David House told Wall Street analysts at a meeting last week that the computer-networking equipment company would let shareholders decide whether to sell, said two analysts who attended the meeting, who asked not to be identified.

For Northern Telecom, the purchase of a data-networking company such as Bay “is not out of the realm of possibilities,” said Peter Nicholson, executive vice president of corporate strategy for Northern Telecom’s parent, Montreal-based BCE Inc.

NorTel is one of the world’s largest makers of equipment used in telephone networks. Bay is the third-largest maker of gear that links computers to corporate data networks and the Internet.

Bay’s profit and sales in the third quarter ended in March fell from the second quarter’s, hurt by competition from larger rivals Cisco Systems Inc. and 3Com Corp.

Analysts estimated that House is looking for an offer in the $30- to $35-per-share range.