The acquisition of FORE Systems of Pittsburgh follows last month's pounds 1.3bn purchase of another US telecoms equipment company, Reltec, and positions GEC strongly in this high-growth market sector.
This is GEC's second deal since it announced the sale of its Marconi defence arm to British Aerospace, and will use up the remainder of its famous cash mountain, leaving the group with net debt for the first time in three decades.
Lord Simpson, GEC chief executive, defended the price for FORE and said GEC was still looking for more, albeit smaller, deals in the telecoms industry. "It is a full price, but nobody is doing transactions at anything other than a full price in this sector," he said.
GEC is paying $4.5bn, or $4.2bn net of debt - a 43 per cent premium to FORE's closing price on Friday and an 80 per cent premium to the company's valuation before GEC's interest became known earlier this month.
But Lord Simpson pointed out that FORE was in one of the fastest-growing sectors of the market and was increasing revenues at 35 per cent a year.
This year the volume of Internet data traffic is forecast to outstrip voice traffic, and FORE equipment is used to switch an estimated two-thirds of global Internet traffic. FORE has a workforce of 2,000 and had net income of $51m last year on sales of $632m, up from $467m the previous year.
The deal will result in a goodwill charge of $3.8bn. But GEC said the impact of the acquisition on earnings before goodwill would be broadly neutral this year and positive thereafter.
Together with the Reltec acquisition, the FORE deal will increase sales of the new-look GEC to pounds 5.4bn. Lord Simpson's goal is to build GEC back up to the same size as it was before the Marconi demerger, with sales of pounds 6.7bn and a market capitalisation of pounds 15bn.
The aim is to combine FORE with GEC's existing Marconi Communications division, giving it a presence in three key equipment areas of transmission, access and switching.
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