Nortel to acquire PEC Solutions for $448m to accelerate US federal business

Nortel announced a definitive agreement that Nortel`s US subsidiary, Nortel Networks Inc (NNI), will acquire Virginia-based PEC Solutions, Inc, a leading government IT services firm, and create US-based Nortel PEC Solutions to provide mission-critical solutions for US federal, state and local government customers.

NNI will acquire PEC for an estimated US$448 million (net of cash acquired) through a cash tender offer for all of the outstanding shares of PEC at US$15.50 per share. Nortel expects the acquisition to be earnings per share (EPS) neutral in 2005 and accretive thereafter.

"Nortel is playing to win, and the acquisition of PEC is another example of Nortel`s unwavering commitment to strategic business initiatives in the government, services and security arenas," said Bill Owens, vice-chairman and chief executive officer, Nortel.

"This acquisition will aggressively position Nortel in the US federal government IT market. This market is characterised by consistent and steady growth and presents a significant opportunity for Nortel, based on expected demand for our specific technology and services capabilities in this market."

PEC, founded in 1985 and based in Fairfax, Virginia, works with homeland security, law enforcement, intelligence, defence and civilian agencies across the entire scope of the US federal government to solve the US`s most formidable technology challenges.

The acquisition of PEC is expected to provide the `accelerator` for Nortel to compete more fully and completely in the government market. Nortel PEC Solutions will combine PEC`s high-end professional services and Nortel`s technology solutions to bring greater value - including a strong combined security offering - to existing partners, new partners, and customers in the US government market.

"We expect growing demand in the government market for our portfolio of converged network solutions - Nortel`s core competencies," said Chuck Saffell, president, Federal Network Solutions, Nortel. "Linked with PEC`s strong and proven track record of over 20 years of delivering differentiating solutions and strong program management, Nortel PEC Solutions will be a winning combination for the US government customers we serve."

With approximately 1 700 employees, PEC has 30 program offices in the US in nine states and the District of Columbia. PEC`s customer base includes the US Secret Service, US Coast Guard, Office of the Chief Information Officer for Homeland Security, the Transportation Security Administration (TSA), Immigration and Customs Enforcement, the Department of Justice, Federal Bureau of Investigation, the US Marshall Service, the Department of Defence, the US Postal Service, and the Department of Veteran Affairs.

"This acquisition is the realisation of a vision we had for PEC when we started the company 20 years ago," said David C Karlgaard, PhD, chief executive officer, PEC. "This move will equip our portfolio of capabilities with complementary world-class technology and global service delivery reach while preserving the best of the PEC experience for our customers. Going forward, the Nortel PEC Solutions brand will continue to be known for the values that differentiate our business: intense client-focus and superior performance."

Upon completion of the transaction, expected in June 2005, PEC will be aligned with Nortel Federal Network Solutions to create Nortel PEC Solutions. Saffell will continue to lead Nortel`s federal business. Nortel PEC Solutions will continue to be headquartered in Fairfax, Virginia. PEC Chief Executive Officer David C Karlgaard, PhD, PEC President Paul G Rice, and PEC Chief Operating Officer Alan H Harbitter, PhD all will remain on the senior executive leadership team.

The merger agreement provides for Nortel to acquire PEC in a two-step transaction in which a cash tender offer will be made for all outstanding shares of PEC common stock at a price of US$15.50 per share, representing a premium of approximately 28% for PEC`s stockholders based on the 30-day trailing average share price of PEC on the Nasdaq National Market for the period ending on 25 April 2005. The tender offer will be followed by a merger in which the holders of the remaining outstanding shares of PEC common stock will also receive US$15.50 per share in cash, without interest.

Consummation of the transaction is subject to certain conditions, including the tender of a specified number of the shares of PEC, receipt of regulatory approvals, and other customary conditions. Certain of PEC stockholders, who collectively beneficially own approximately 53% of the fully diluted shares outstanding of PEC, have entered into certain agreements in connection with the merger agreement, including commitments to tender shares in the offer. In addition, these stockholders granted Nortel an option exercisable under certain circumstances to purchase a number of their shares representing 35% of the outstanding shares of PEC. The tender offer is expected to close in late May, unless extended. The agreement has been unanimously approved by the boards of directors of Nortel and PEC. BB&T Capital Markets | Windsor Group acted as financial advisor to Nortel for this transaction and JP Morgan represented PEC.

The tender offer for the outstanding shares of PEC has not yet commenced. This announcement is not a recommendation, an offer to purchase or a solicitation of an offer to sell shares of PEC. At the time the offer is commenced, NNI will file a tender offer statement with the US Securities and Exchange Commission, and PEC will file a solicitation and recommendation statement with respect to the offer. When they become available, PEC security holders should read the tender offer statement (including an offer to purchase, a related letter of transmittal and other offer documents) and the solicitation and recommendation statement carefully because they will contain important information with respect to the tender offer. Those materials will be made available to PEC security holders by Nortel and PEC at no expense to them. In addition, all of those materials (and all other offer documents filed with the Securities and Exchange Commission) will be available at no charge on the Securities and Exchange Commission`s Web site at www.sec.gov.

A conference call for media will be held today, 26 April 2005 at 9am Eastern to discuss the transaction. To participate on the call, please dial 1 800 443 6290 (North America) or 1 415 537 1822 (International). To join via the Webcast, visit www.nortel.com/pressconf042605. A replay of the conference call will be available later in the day at www.nortel.com/pressconf042605.