Marconi: M&A Moves Next?

Talk spreads that the wireless unit is up for sale

August 5, 2005

6 Min Read
Marconi: M&A Moves Next?

British equipment vendor Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) is seeking ways to cut costs and build new lines of business, and it may even be seeking the sale of some assets, according to a source familiar with the plan (see BT Shuns Marconi for 21CN and Marconi in Turmoil).

Marconi is believed to be looking for other ways to slim down, after BT Group plc (NYSE: BT; London: BTA) failed to give the company a chunk of its new spending initiative, a decision that halved its valuation in a few days (see Marconi to Cut 800 Jobs). To that end, one source says that Marconi has asked a telecom M&A specialist, Daniels & Associates, to find a buyer for its wireless network planning and optimization business, which has just announced a new customer (see Marconi Optimizes Orascom).

That unit has its revenues included in the "access products" revenue line that totaled £32 million (US$56.9 million) in sales in the most recent quarter (see Marconi Reports Q1 Loss). Marconi declines to comment on the suggested M&A activity and says it doesn't supply any breakdown of the access products revenue line.

A company spokesman, though, did say that the business unit currently employs just over 300 people, mostly in the Dallas area.

A spokesman for Daniels & Associates says the company is "not able to make any comments regarding Marconi at this time."

But it seems logical that Marconi would take further steps in restructuring. The company needs to increase its revenues as well as cut its costs, as Marconi says it will suffer a £50 million ($89 million) shortfall from BT, its single biggest customer this year (see Marconi Treads Water). Industry analysts have estimated that if Marconi had been chosen by BT for its £10 billion ($17.7 billion) 21CN project, that business could have been worth between £500 million ($887 million) and £700 million ($1.24 billion) over the next five years or so.

Despite its predicament, and the fact that the company's stock, at £2.67 in London, is still trading at about half the price it held before BT's bombshell, CTO Andy Evans says the "mood is positive." That's right -- positive! "There are a lot of new business opportunities. We're just getting on with running the business, we've got £281 million [$498 million] on the balance sheet, and we're pretty optimistic right now." He does admit, though, that "we were disappointed it happened," when asked about BT's decision.

Looking ahead, Evans believes there is an opportunity in the market for Marconi's XCD5000 softswitch and associated VOIP infrastructure systems, the technology BT rejected for its "intelligent nodes" in favor of softswitching systems from Ericsson AB (Nasdaq: ERICY). (See Ericsson to Bring Partners to 21CN Party.)

Certainly Marconi has been trying to draw attention to its VOIP system capabilities (see Marconi 'Confirms Softswitch Commitment' and Marconi Softswitch's Ready for Russia). "Our softswitch is live today, carrying live calls in the U.K. and other countries, and the feedback from the trials we had with BT were that it met or exceeded the required performance levels," says Evans (see Gamma Picks Marconi SoftSwitch , Kingston Integrates Marconi Softswitches, and Marconi's First Softswitch Sale). "And we're going to continue to develop the product's carrier-class capabilities, bridging the worlds of the PSTN and SIP/IMS. We believe this will appeal to carriers. We're seeing a broad interest in migrating to next-generation networks, from France to Russia to China."

Evans says SIP is the technology that can help carriers achieve the "Holy Grail of service creation and delivery. SIP is the first step, and IMS is the subsequent step." (See IMS Takes Over the World and IMS Guide.) He says IMS crops up in most customer discussions. "Carriers want to see a roadmap to an IMS architecture. They believe it will be important, but they're not quite sure how -- though they can see the shift in their businesses from fixed towards mobile, and towards service convergence."

That may not be enough, though, according to industry analysts. Heavy Reading analyst at large Graham Beniston says Marconi's softswitch is "technically credible. They understand the security and bandwidth issues, and they certainly understand telephony, including the migration from TDM to VOIP, though they were late to add SIP." (See Marconi Adds SIP to Softswitch.) Beniston says Marconi's huge disadvantage is that it has no track record with the mobile operators. That's the main reason BT picked Ericsson for its 21CN. "Those in the best position have a wireless background, such as Ericsson, Alcatel, Lucent, Nortel, and Siemens," he says. "And then there's Huawei to contend with." Other players in the market include Italtel SpA and Sonus Networks Inc., says Beniston (see Who Makes What: VOIP Infrastructure Equipment).

Kevin Mitchell at Infonetics Research Inc. also believes Marconi is in for a hard time in the softswitch game. "Marconi definitely has an uphill battle from a technology standpoint . It's built for the U.K. market, and has no proven large scale deployments -- and from a perception and marketing standpoint, it only has a few small customers and lost on its home turf."

Concerns that Marconi is now too small to survive by itself have given rise to industry gossip that victorious 21CN vendor Huawei might fancy the British vendor's installed base and BT experience (see Could Huawei Buy Marconi?).

Evans simply points to the mutual distribution agreement the two companies have drawn up, hinting that further joint work might be in the works as the combination "offers a good way to fill in some gaps without having to engage in R&D." But beyond that he "can't add anything to the Huawei topic."

— Ray Le Maistre, International News Editor, Light Reading

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