PairGain Agrees to Be Acquired by Rival ADC Telecom

PairGain Technologies Inc., a pioneer of high-speed communications devices, agreed to be acquired by a rival for $1.6 billion in stock, heralding the start of a predicted round of mergers among digital network-equipment makers.

The Tustin company and ADC Telecommunications Inc. in Minneapolis said Wednesday that PairGain operations will be folded into ADC. The deal creates a colossus that could dominate the booming market for devices that allow lightning-fast Net access over conventional telephone lines.

ADC is picking up a company rebounding from years of financial strife and an Internet hoax that sent its stock seesawing and triggered a criminal investigation.

Both companies make equipment that is used to provide digital-subscriber line, or DSL, service. DSL technology offers computer users Internet access that is always on and cruising speeds that blaze up to 140 times faster than that offered by 56K modems sold today with personal computers.

Rolling out the service has been long-delayed, but telephone and cable companies are pushing hard to provide DSL connections as the public demands faster access to the Internet.

ADC, which makes networking devices for telephone companies, said the merged companies would shed about 200 employees, including about 100 of PairGain’s 800 workers. About 650 of PairGain’s employees are based at the company’s Orange County headquarters.

Long rumored to be on the selling block, PairGain said it approached ADC as a possible suitor several months ago.

Though the PairGain corporate name will disappear, the company’s operations will remain in Tustin, and several top PairGain officials will take on senior roles at ADC, PairGain Chief Executive Michael Pascoe said.

“We had been looking for someone to be the right fit for us,” Pascoe said. “We had felt for some time that the technology and size of our company would really pay off.”

ADC said it will swap 0.43 share for each PairGain share, or pay $20.13 a share for the company. That puts the deal at 25% more than PairGain’s closing price of $16.06 on Tuesday.

The acquisition, pending shareholder approval, is expected to be finished by June.

Despite Wall Street’s reaction on Wednesday--ADC shares dropped $2.81 to $44, while PairGain jumped $1.44 to $17.50 amid heavy trading--analysts praised the deal as a smart move for both companies.

ADC’s expertise in distribution, sales and administrative support would give PairGain’s products greater market penetration than the Tustin company could hope for on its own, they said.

“PairGain had the technology, but you could argue its execution and ability to bring products to market was not sufficient,” said Tim Savageaux, an analyst with WR Hambrecht & Co. “This company has been struggling for a long time and should benefit from being part of a larger organization.”

PairGain has experienced several odd jolts in the last five years, mixed in with more routine financial disappointments.

In the mid-1990s, PairGain lost as much as $28 million that it had invested with high-profile financial advisor Jay Goldinger. Federal prosecutors accused the company of not disclosing the investment losses properly and filed criminal charges against PairGain. The company pleaded guilty to a record-keeping charge and agreed to pay a $1.4 million fine.

Last year, PairGain found itself the victim of a crime when an employee posted a bogus news report that the company was being bought for $1.35 billion, causing a 30% run-up in its stock price.

Today, PairGain’s stock price is less than half the highflying levels it reached in 1996. Faced with increasing competition in 1998, PairGain posted five consecutive quarters of declining profit and revenue.

PairGain, however, was still attractive despite its troubles, ADC Chief Executive William Cadogan said.

With the Tustin company, ADC can knock out a prime rival and expand its own engineering and development team at the same time, Cadogan said.

Even more tantalizing is PairGain’s Avidia System, which creates an electronic “path” for high-speed data and Internet traffic.

Widely praised by industry analysts for its design, Avidia will fill a major hole in ADC’s product line just as the market for this service is poised to explode, Cadogan said.

“We’re right at the knee of the curve,” he said.

The telecommunications industry has been promoting DSL and its benefits since the mid-1990s. But technological problems, rising costs in rolling out the service and confusion among consumers over the different types of DSL has caused delays.

But as the public demand for faster Internet access grows, phone and cable companies are scrambling to provide DSL service. Many providers have eliminated their hefty installation and equipment fees and slashed their monthly service charges to new lows.

DSL’s biggest limitation, however, is that not everyone can get it. The service is available only in places where the phone company has “conditioned” the copper lines to allow data to move at higher speeds.

While the high-speed communications market grows, the industries that feed into it are starting to merge. Semiconductor companies like Intel Corp. and Broadcom Corp. have been gobbling up smaller rivals in an effort to expand their portfolios of technologies.

“It was only a matter of time before you started to see it in the equipment space,” said Kimberly Funasaki, a senior analyst for the research firm International Data Corp.

In one pending deal, Nortel Networks Corp. has said it will pay about $780 million for Promatory Communications Inc., which makes a product that is similar to Avidia but less well-established in the market.

Also Wednesday, telecommunications giant Alcatel grabbed Newbridge Networks Corp. in a $7.1-billion deal that will give the French telecom equipment maker a more solid footing in the United States.

Though such mergers won’t have any immediate impact on consumers, it will help consolidate “a very competitive marketplace,” said Cynthia Brumfield, president of Broadband Intelligence Inc., a consulting firm in Bethesda, Md. “There’s a lot of room for a shakedown. This is a nice, big market, but it’s only going to grow so fast before it levels off.”

Cadogan said ADC has no plans to move additional employees from Tustin, though the company will proceed with PairGain’s existing decision to move parts of its operation to Mexico.