The Canadian giant's decision to buy the Californian company for an estimated $9.1 bn (pounds 5.6bn) was not unexpected, though there had been long negotiations over the price. Shareholders in Bay Networks will receive 0.6 of a Nortel common share for each share which they own, which values the company at $38.21 a share. Bay Networks shares closed at $28.3125 on Friday, representing a considerable premium for its shareholders.
Northern Telecom shares were at $56.13 at noon yesterday, down $7.563 on the day and down from $63.69 at Friday's close.
Nortel makes telephone equipment, while Bay Networks makes computer networking equipment, but as computers are increasingly used to send voice and images as well as data, the difference between the two is decreasing.
The deal creates a $17.7bn company with 80,000 employees worldwide that will be able to compete in both markets. It will be able to deliver Internet Protocol integrated services through local or wide-area networks, allowing users to send voice, data, or video through their own internal systems or the telephone system.
It is the largest deal so far between telecoms companies and data network providers, though more are likely to follow. Northern Telecom is a middle- ranking player in the telecoms market, and Bay Networks has struggled to keep up with larger companies such as Cisco Systems.
As a result of the deal, Bay Networks becomes a wholly-owned subsidiary of Nortel. David House, Bay's chairman, will become President of Nortel, while John Roth, currently President and CEO of Nortel, will remain CEO and a director. Bay shareholders will hold 21 per cent of the merged company, and Nortel will issue another 134 million common shares to cover the deal.
The announcement came as Microsoft and Time Warner, the software and media behemoths, said they had closed a previously-reported deal to deliver high-speed Internet services via cable television.Reuse content