The proposed acquisition follows the agreement by Tellabs Inc to buy upstart Ciena Corp for $7.1 billion, and industry analysts said both deals highlight the need for small equipment makers to join forces and product lines to compete against industry giants such as Lucent Technologies Inc.

The takeover targets gain the chance to join a bigger company with broader product portfolios and deeper Financial pockets. The combined companies, which will join research and development efforts, also can reduce the time it takes to bring new products to market, analysts said.

"I think size is a factor. Big (telecom) carriers are getting bigger and bigger. They need to have suppliers with stronger backing," Ted Moreau, a telecommunications analyst with RW Baird, said.

Alcatelsaid the DSC acquisition would bolster its presence in the US telecommunications equipment market and open doors to potential clients such as the Baby Bells, which are scrambling to upgrade their networks to handle increased voice and data traffic.

DSC's strong position in making telecommunications access and switching equipment and intelligent networking will complement Alcatel's strength in data transmission products, analysts said.

"We have the feeling that DSC brings what we're missing," Alcatel chairman Serge Tchuruk Alcatel told a news conference in Paris.

"Alcatel is one of the best possible partners (for DSC)," Robert Wilkes, a telecommunications analyst with Brown Brothers Harriman, said. "It gives Alcatel a strong position in the US and gives DSC's product line a presence in a larger company."

DSC, whose stock was the most actively-traded issue on Nasdaq, soared $7.6875 to $27.37, building Wednesday's gains as takeover rumours circulated.

The deal will also give DSC's chairman, JamesDonald, who said in April he planned to retire, the comfort of knowing DSC will be part of stronger, thriving company rather than just leaving the company to a successor who may or may not succeed, analysts said.

Under the terms of the agreement, which has been unanimously approved by the boards of both companies, DSC shareholders are to receive 0.815 share of Alcatel's American Depository Shares for each share of DSC they hold.

Converted into ordinary Alcatel shares, each DSC share would be worth 0.163 share, the companies said.

Shares of Alcatel slipped $4.375 to $39.0625 on the New York Stock Exchange after the company said it would issue 20 million shares to finance the purchase. That share issue represents a capital increase of around 12 percent.

Some US-based analysts expressed surprise at the 80 per cent premium Alcatel was paying for DSC, considering DSC's first-quarter loss and 9 per cent drop in revenues. Other analysts said the high premium, which is based on DSC's June 3 closing price of$19.69, may be an effort to prevent a competing bid.

Paris-based Alcatel, which recorded $31 billion in sales last year, said it will fold Dallas-based DSC into its US telecommunications equipment business, Alcatel Network Systems Inc. In 1997, DSC reported annual revenues of approximately $1.6 billion.The combined US operations would be headquartered in Dallas and have operations in North Carolina and California.

Alcatel said it expected the deal to have little effect on its earnings in 1999, after taking into account expected cost savings. The purchase is expected to contribute to its bottom line afterward.

By combining the two businesses, annual costs should be cut by $120 million next year and around $200 million thereafter.

(Reuters)