The General Electric Company, p.l.c. ("GEC") and FORE Systems, Inc. today announced that they have entered into an agreement for the acquisition of FORE Systems for total consideration of $4.5 billion (lb2.8 billion) ($4.2 billion, net of cash) at an agreed price of $35 per share in cash. This represents a premium of 43% to the FORE Systems closing price on Friday 23 April 1999. The definitive merger agreement provides for an affiliate of GEC to commence a cash tender offer for all of FORE Systems` shares at $35 per share on or before 30 April 1999. Upon completion of the Offer, GEC will effect a merger between this affiliate and FORE Systems, following which FORE Systems will become a wholly owned subsidiary of GEC.
FORE Systems, with revenues of $632 million in the year ended 31 March 1999, is a leading global supplier of high performance, Internet switching equipment based on a "best in class" portfolio of products featuring Asynchronous Transfer Mode ("ATM"), Internet Protocol ("IP"), Gigabit Ethernet, and Firewall switching technologies. These systems are used in the backbone of some of the largest enterprise and Internet service provider networks in the world. FORE Systems` award-winning solutions are recognised in the industry for their ability to handle the stringent and dramatic capacity, scaling, and resiliency requirements of today`s rapidly growing Internet. This is why a major portion of the global Internet traffic is switched by FORE Systems equipment. In addition, FORE Systems` products support the advanced Quality Of Service (QoS) and traffic management necessary to deliver a scalable multiservice switching solution for the emerging New Public Network.
The combination of ATM and IP switching from FORE Systems and GEC`s MARCONI Communications` call control (SS7) and Intelligent Networking provides the "best in class" switching foundation for the New Public Network. Along with MARCONI Communications` leading optical networking solutions and next generation access products (recently acquired with Reltec), GEC is positioned at the forefront of the rapidly growing global communications infrastructure market. This acquisition strengthens the GEC Group`s presence in the United States, which is the
world`s largest market for telecommunications equipment. In addition, this transaction provides GEC with access to the high growth enterprise networking market, which is becoming increasingly integrated with the carrier market. The combined company will be able to bring a broader range of products and technology with greater strength and scale to address enterprise businesses world-wide. As a result, FORE Systems will enhance its ability to experience significant growth rates that outpace the overall industry average.
George Simpson, Chief Executive of GEC, said: "This acquisition reinforces our position as a leading supplier of voice and data networking technology. The purchase of FORE Systems provides us with access to new markets and new customers and extends our product portfolio into the increasingly important ATM and IP switching sector. This is also a big boost to MARCONI Communications` already considerable technology base. We will now be in a position to capture the full benefits of the impact of the explosive growth of Internet and other data traffic on the demand for communications equipment and systems."
Thomas J. Gill, President and Chief Executive Officer of FORE Systems, said: "The combination of FORE Systems, Reltec, and MARCONI Communications will create one of the world`s foremost global telecommunications and networking equipment companies. Together we can provide our customers with a comprehensive range of integrated solutions to accommodate the rapid growth of high-speed data, voice and video services on a global basis. Joining forces with GEC will provide further new and exciting opportunities for FORE Systems employees throughout the world, and allow us to accelerate the growth of our business. We are committed to driving FORE Systems to achieve its full potential within the GEC Group."
FORE Systems - A leader in ATM and IP switching
FORE Systems, based in Pittsburgh, Pennsylvania is a leading designer and producer of high performance networking products based on ATM and IP technologies. FORE Systems has approximately 2,000 employees, of whom approximately 1,450 are based in the United States.
FORE Systems` range of products includes ATM and Ethernet switches, adapter cards, multiplexing products, internetworking software, network management software and video products.
FORE Systems is a leader in the enterprise and private networks market, where its key customers and partners include numerous departments of the US Government, several universities, and commercial enterprises such as Delta Airlines, Donaldson Lufkin & Jenrette, Disney Animation, Chrysler, Intel, Lloyds TSB, Microsoft, Prudential Insurance, Shell Oil and Unisys. FORE Systems also has a strong and rapidly growing presence in the carrier market, where its key customers include Cable & Wireless USA, GTE, Level 3, MCI WorldCom and UUNet.
FORE Systems reported sales of $632 million for the year to 31 March 1999 (an increase of 35 per cent. over $467 million for 1998). Operating income before interest, taxes and non-recurring items was $55.4 million in 1999 (up 48 per cent. from $37.5 million in 1998).
As of 31 March 1999, FORE Systems had net assets of $680 million including cash and short term investments of $361 million.
Mr Tom Gill will continue as FORE Systems` CEO and President, and will report directly to George Simpson, Chief Executive of GEC. FORE Systems will operate as a wholly owned subsidiary of GEC and will continue to run its business accordingly, while continuing to use the name of FORE Systems. In addition, FORE Systems will work aggressively with MARCONI Communications to exploit the natural synergies between both units to take a leadership position in delivering a new generation of public network solutions.
Strategic rationale for the acquisition
The dramatic growth of the Internet has resulted in data traffic becoming a rapidly growing percentage of total network traffic, with Internet data traffic expected to exceed voice traffic in total volume this year. In addition, the telecom service industry is becoming increasingly competitive due to deregulation and the emergence of new telecom service providers. The pressure on carriers to reduce costs and increase the flexibility of their networks has become intense. The combination of these factors has meant that telecom service providers have increasingly focused on new data networking technologies, which are efficient at handling large volumes of data. This is referred to in the industry as "The New Public Network". This is driving the rapid growth in demand for ATM and IP switching systems and optical transmission networks equipment, software and systems. FORE Systems is a leading supplier of ATM and IP solutions, and MARCONI Communications is a leading supplier of optical networking solutions.
FORE Systems represents an attractive acquisition for the following reasons:
Strong technology: The acquisition will provide MARCONI Communications with industry leading technology in ATM and IP switching, the technology that is critical for building next generation telecommunications networks. Combining this with MARCONI Communications` broad portfolio of telecommunications products will enable MARCONI Communications to establish a leadership position in defining and building out New Public Network infrastructures and solutions and to service more effectively its existing customers.
Enhanced penetration of the carrier market: The acquisition will substantially expand MARCONI Communications` customer presence in the United States. In particular, the acquisition will provide access to the fastest growing telecom carriers in the U.S. including Internet Service Providers and new Competitive Local Exchange Carriers, which will provide significant opportunities for cross selling.
Entry into the enterprise market: The acquisition provides GEC with a significant presence in the enterprise data networking market, opening additional channels for sales for other products to corporations and access to new technologies.
Enhanced development capabilities: The acquisition brings to MARCONI Communications "state of the art" development capability in rapidly evolving technological fields, for example ASIC based IP packet processing and switch fabric design. These development resources will enable MARCONI Communications to respond quickly to new market opportunities and service customers` future needs more effectively. In summary, the FORE Systems acquisition provides GEC with technology and market positions in a key and very rapidly growing area of the telecoms equipment and systems market and provides a complementary product range, which will provide substantial opportunities for increased sales.
Financial impact on GEC
It is expected that the acquisition will be broadly neutral to proforma new GEC earnings per share before goodwill (assuming that the demerger of MARCONI Electronic Systems and associated transactions are completed) in the year to 31 March 2000 and thereafter it is expected to be earnings enhancing. GEC will finance the acquisition from cash resources and from drawings under its Euro 6 billion group bank facilities.
Further details of the transaction structure
GEC Incorporated and FORE Systems have entered into a definitive merger agreement (the "Merger Agreement") under which a US subsidiary of GEC ("Acquisition Corp.") will commence a cash tender offer (the "Offer") on or before 30 April 1999 for all of FORE Systems` shares at $35 per share. Following the completion of the Offer, GEC and FORE Systems have agreed to effect a merger between Acquisition Corp. and FORE Systems (the "Merger"), in which the remaining shareholders of FORE Systems will receive the same price per share paid in the Offer. Upon completion of this Merger, FORE Systems will be a wholly owned subsidiary of GEC.
The Merger Agreement provides that FORE Systems will pay a termination fee to GEC in the event that the Merger Agreement is terminated under certain circumstances.
In addition, GEC and FORE Systems have entered into a Stock Option Agreement (the "Stock Option Agreement") whereby FORE Systems has granted an option to Acquisition Corp. to purchase up to 19.9% of the shares of FORE Systems at the offer price, which shall be exercisable in most cases when the termination fee is payable and in certain other limited circumstances.
Simultaneously, on entering into the Merger Agreement, certain members of the management and board of FORE Systems have entered into a stockholder agreement (the "Stockholders Agreement") whereby they have agreed to sell their shares in FORE Systems to Acquisition Corp. and to vote in favour of the merger. The senior management group has also entered into new employment agreements.
The Merger Agreement and the Stock Option Agreement have been approved by the Boards of Directors of GEC and FORE Systems and the Stockholders Agreement has been approved by the Board of Directors of GEC. The Offer and the Merger are conditional upon, inter alia, receipt of the required regulatory approvals and clearances. Assuming regulatory approvals and clearances are received, it is anticipated that the acquisition of FORE Systems will be completed in June 1999.
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