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Nortel Takes a Look at Tellabs

Phil Harvey
8/30/2007

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) is still in talks with potential buyers and the latest name to join the party is Nortel Networks Ltd. , Light Reading has learned.

Tellabs is seen as a solid technical fit for Nortel, according to sources close to both companies, and one Light Reading source on Wall Street says Nortel is ready to make an offer in the range of $14 to $15 a share.

Tellabs was up $0.14 (1.38%) to $10.25, on below average volume, in trading on Wednesday, giving it a market value of $4.5 billion. Nortel was up $0.08 (0.46%) to $17.60.

Nortel, which missed out on Avaya earlier this year, has been on the hunt for a way to expand its businesses now that its financials have stabilized. (See Nortel: Kissing Avaya Goodbya? and Nortel's Z-Man Hints at M&A.) Tellabs, the central figure in nearly every telecom M&A rumor this year, was reportedly close to being snapped up by Nokia Networks in July. (See Is Nokia Siemens Tailing Tellabs? and Tellabs Mum on M&A Talks.)

Our Wall Street source indicates that the Nokia Siemens talks are ongoing, but Nortel is throwing its hat in the ring as well. And, for Nortel, that's one way it can bring back the scale and sway it once had in North America, before years of cost cutting took its toll.

"A real turnaround will need renewed revenue growth, and [Nortel's] various initiatives on this front could take years to come to fruition (if ever)," wrote Deutsche Bank AG analyst Brian Modoff in a note to clients issued Aug. 2.

The Tech Story
Sources close to both companies say the technology story of a Tellabs/Nortel combo would be fitting. "There's almost no product overlap and the ROADMs that Tellabs has could help Nortel modernize its optical networking story -- maybe giving it something to upsell to its old Optera customers," says one source.

Others point out that even for Nortel's focus on wireless -- and recent obsession with IPTV -- Tellabs would work. The Tellabs 8600 and 8800 are used in various wireless network applications, with the former being used mostly as wireless backhaul. In Australia, Telstra has been deploying the 8800 as a replacement for Nortel's incumbent Passport switches: Nortel had been supplying Telstra with data switches since 1989. (See Telstra Unveils Next IP.)

In the access technology market, sources say Tellabs could use Nortel's weight to ramp up its FTTH business, which has hit some speed bumps in the GPON races at AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). (See AT&T Picks GPON Players.)

Nortel, having backed away from the broadband access business years ago, could use Tellabs's gear to boost its IPTV applications story. (See Nortel Eyes IPTV Prospects, Sources: Nortel Planning IPTV Acquisitions, and Nortel CEO: We Blew It on DSL.)

Examining Options
Aside from the chatter on Wall Street, some options trading may provide another clue that investors believe Tellabs will be sold. Susquehanna Financial Group published a note Wednesday pointing out that Tellabs investors are "rolling a long call position from September to October." The move was a call option to buy 10,000 shares of Tellabs for $12.50 before October 20.

The analysts at Susquehanna say the move implies the investor anticipates "increased volatility" in the stock before late October.

Granted, we can't read the investors' minds, and they may have been buying the options to offset the risk of a short position. But experts say the move suggests investors see an upside in Tellabs's shares.

In addition, the options move noted above coincided with the first whispers that Nortel was in the hunt for Tellabs. "Perhaps renewed speculation of a potential deal prompted investors to roll out the position,” says Chris Jacobson, a Susquehanna analyst.

Tellabs and Nortel, respectively, declined to comment on rumor and speculation. They won't comment on this article, either.

— Phil Harvey, Managing Editor, Light Reading

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twill009
twill009
12/5/2012 | 3:03:24 PM
re: Nortel Takes a Look at Tellabs
Sounds to me like you are being used.
LEDzeppelin
LEDzeppelin
12/5/2012 | 3:03:23 PM
re: Nortel Takes a Look at Tellabs
NO, of course.
vmg00
vmg00
12/5/2012 | 3:03:23 PM
re: Nortel Takes a Look at Tellabs
21 acquisitions in 10 years. Will this one be lucky for Nortel?
zwixard
zwixard
12/5/2012 | 3:03:23 PM
re: Nortel Takes a Look at Tellabs
The only financially sound company that builds core network boxes is Cisco. Nortel needs more access biz.
DCITDave
DCITDave
12/5/2012 | 3:03:22 PM
re: Nortel Takes a Look at Tellabs
re: "Phil - obviously your Wall St contact is using you to cover his position in Tellabs. Do you really think Nortel would spend close to $5 B on Tellabs...come on?"

Tellabs' customers are consolidating. Its competitors are consolidating. Its market cap is 4.65B -- So, yeah, I think it's possible.

And, as the story points out, Nortel isn't the only company in the hunt, so keep that in mind as we wait to see how NSN reacts.
DCITDave
DCITDave
12/5/2012 | 3:03:22 PM
re: Nortel Takes a Look at Tellabs
re: "21 acquisitions in 10 years. Will this one be lucky for Nortel?"

wow. has it been that many? amazing.
dlakhanp
dlakhanp
12/5/2012 | 3:03:22 PM
re: Nortel Takes a Look at Tellabs
Phil - obviously your Wall St contact is using you to cover his position in Tellabs. Do you really think Nortel would spend close to $5 B on Tellabs...come on?
jmunn
jmunn
12/5/2012 | 3:03:22 PM
re: Nortel Takes a Look at Tellabs
Nortel is so well practiced at taking over our competitors and making sure they disappear into the quagmire, never to produce competitive products again.

Please don't buy us!

Access to bandwidth is good!
MrLight
MrLight
12/5/2012 | 3:03:20 PM
re: Nortel Takes a Look at Tellabs
In response to Phil HarveyG«÷s post 7 :

"re: "21 acquisitions in 10 years. Will this one be lucky for Nortel?"

Yes Nortel has made a lot of acquisitions, but so have a lot of other companies in their sector during those times. Yes it is nothing for Nortel to be proud of, but it was not a total loss, especially if one considers that these acquisitions were paid for mostly with highly inflated stock.

I feel 3 or 4 of those G«£21G«• acquisitions provided some good products that added to Nortel's bottom line. Not a great batting average I admit but better than some of the VCs that have gone by the wayside.

Those 3 or 4 successes were based on acquiring companies with a new product with little or no legacy support issues and not a whole company (okay maybe PEC Solutions is one that was okay) or companies with just chart-ware or companies with partially working prototypes.

Initially these successfully acquired products were left to the people that came with them to adapt fit into NortelG«÷s product architecture and do the initial launch into NortelG«÷s markets. Over time the people and the products became part of Nortel proper as more and more of Nortel's core infrastructure was used to get the product volume ramped and expand product sales. Note when I say G«£over timeG«•, since where Nortel forced the issue they failed miserably G«Ű I think there is no shortage of people who wonG«÷t agree with me on that.

Now using the above criteria one can say the June 1998 acquisition of Bay Networks was one of these because of the 8600 and some of the enterprise switches Nortel gained, but I have to say the negatives aspects of that acquisition offset these and I would class is as a neutral acquisition.

So I hope Nortel thinks long and hard about what I wrote before looking at an M&A with Tellabs, especially since Tellabs products are not global and they have gaps in their access portfolio.

MrLight ..was in one of the 3 or 4
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