Telcordia M&A strategy may look expansionist, but it's a vital defensive play

June 4, 2004

7 Min Read
Telcordia: Buy Buy or Bye Bye

Like any company on a euphoric shopping spree, Telcordia Technologies Inc. is being very bullish about the benefits of buying inventory management firm Granite Systems Inc. (see Telcordia Shells Out at Last and Is Granite Losing Its Zing?).

Its primary, publicly stated goals have been to expand its presence in Europe and in the mobile sector. In buying Granite it ticked both those boxes. Not only that, it picked up a well respected, fast-growing OSS firm for an alleged $100 million, about twice current annual revenues, according to those in the know. Proud speeches and puffed chests all 'round at the Piscataway, N.J., headquarters.

But is there more to this acquisition? You'd better believe it. Telcordia is facing a major problem. It's called the "next-generation network." And if Telcordia doesn't play its M&A cards right, the evolution of the converged multimedia network might just be the death of it.

To look at its Website or listen to its marketing spiel, one wouldn't think the emergence of the NGN would be such a potential disaster for Telcordia. In fact, you'd think it was a great opportunity to develop and sell OSS systems (such as Granite's) that'll help carriers run converged, IP-based networks. And so it is.

So why is NGN such a threat? Well, here's the deal. In the bad old days (and to a massive extent this still holds), Telcordia had the RBOCs and the telecom equipment vendors by the short-and-curlies. The software running the massive ILEC networks was Telcordia software, and whenever changes, updates, or additions needed to be made, Telcordia was the only external party that could help – and it charged a fortune for the service.

Such was the dominance of this OSS that any hardware being integrated into the RBOC networks had to work with the Telcordia OSS, and a compliance procedure and clean bill of health from Telcordia was required by the kit vendors before they could win any RBOC business. That compliance procedure, which is still costing hardware firms an absolute fortune, is called Operations System Modifications for the Integration of Network Elements, or Osmine (see Telcordia's Osmine Gold Mine).

Anecdotal evidence suggests the RBOCs don't much like Osmine, and a Boardwatch poll conducted last year suggests it's not that popular with the broader telecom sector either. Fifty-eight percent of the respondents said Osmine charges were a "complete ripoff"; 63 percent thought the whole Osmine process ought to be subject to an antitrust investigation (see Osmine On Trial). Telcordia, which pockets millions from operators and vendors alike, is understandably keen on the process (and not at all keen on Osmine being criticized – which is probably one of the reasons for Telcordia's stated policy of refusing media requests from Light Reading and its affiliated sites.)

But the emergence of NGN is starting to chip away at the hereditary reliance. With renewed capex budgets and grand project plans based on next-gen technologies, the RBOCs are, if only in a small way, bypassing Telcordia for some of their new OSS requirements (see, for instance, Will RBOCs Undermine Osmine?). There are two reasons for that: Telcordia can't meet all their new needs; and they want to escape their pact with the New Jersey Devil.

And we're not just talking about tests and trials. At least one RBOC, SBC Communications Inc. (NYSE: SBC), has gone as far as using a new OSS system instead of one of Telcordia's key legacy products in the Telcordia software arsenal – TIRKS (Trunk Information Record Keeping System), an inventory and provisioning system. A small drop in a very big ocean, perhaps, but the resulting ripples could develop into waves capable of rocking the Telcordia ship.

By itself, that's bad enough news for Telcordia. If the RBOCs reduce their reliance on legacy OSS systems, that hits Telcordia's two main sources of revenue: maintenance and support of the installed software base, and Osmine. No one needs Telcordia to test for hardware compliance with another vendor's OSS. And if NGNs are the future of the telecom industry, as everyone says they are, then it's downhill all the way for the legacy business that made Telcordia the fat and complacent company it had become.

That complacency and arrogance have also damaged Telcordia's business, and persuaded the RBOCs to look further afield. Telcordia's CEO Matt Desch admitted as much during the conference call to announce the Granite acquisition. He said his company's relationship with the RBOCs had deteriorated in recent years, and that had led the ILECs, with their billion-dollar capex budgets, to look elsewhere for their software. Desch claims all is sweet now between the OSS giant and its major customers.

But it's not just the RBOCs that are ditching Telcordia's OSS, and SBC isn't the only carrier to shut off TIRKS in favor of a new OSS system. One of Telcordia's few European carrier customers, Telecom Italia SpA (NYSE: TI), has done the same thing.

All of this is putting pressure on Telcordia's senior management. This is a trend they need to reverse. And to add to the pain, the company's revenues are in major decline. They're down from $1.44 billion in fiscal 2002 to $892 million in 2004. Yes, there's been a market downturn, but, give or take a few dollars, that's nearly a 50 percent slump in just two years.

So what can Desch and his team of desperados do about all this? Well, one part of the strategy is to build a new image, a new marketing massage, and a stronger international presence based around a new senior team (see Telcordia Opens Up and Telcordia Targets Europe – Again).

The other – and more challenging and aggressive – move it's adopted is the "let's try and buy our way out of trouble" approach (see Telcordia's on the Prowl). At both SBC and Telecom Italia, TIRKS was being phased out in favor of an OSS called Xng (pronounced ZING!!) from an OSS startup called Granite. Yup, the very same.

So not only did Telcordia buy its way into its target markets in buying Granite, it also bought back the accounts it had lost at SBC and Telecom Italia! Genius stuff.

And even then – because of alleged late interference from Telcordia's parent company Science Applications International Corp. (SAIC) – it nearly dropped its new baby (see Telcordia Nearly Blew Granite Deal).

So while the Granite deal may have looked like a bold break into new territory, it was just as much a defensive move to reclaim legacy business it was losing to a new OSS insurgent. And it knew exactly what the score was with Granite: Through its VC arm, SAIC was a second-round investor in the inventory system vendor. And Granite wasn't SAIC's only OSS investment (see Who's on Telcordia's Shopping List?).

The Granite episode looks set to establish a pattern. Telcordia needs to expand but cover its back at the same time. Its acquisitions need to bring it new technology, expertise, people, and customers, but it also needs a new lease on life with the Baby Bells as they plan to adopt and build out NGN technologies. And, if it can, Telcordia needs to get the inside story on any target's financial state and business strategy before it pounces.

Without the right acquisitions, and a savvy strategy to make them work (and how many acquisitions bring home the expected bacon?), Telcordia could slowly sink into oblivion or even be snapped up by a rival player with market momentum, as the NGN bandwagon rolls into more and more telecom towns.

And given the general impression Telcordia has left on the telecom sector during the past few decades, it's hard to imagine there'd be too many sad faces waving it goodbye if that were to happen.

— Ray Le Maistre, International Editor, Boardwatch

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