Is Nokia Siemens Tailing Tellabs?
Late Friday The Street cited a source saying that Tellabs was examining a bid from the recently merged European vendor giant of about $16 to $17 per share, which would value Tellabs at $7 billion to $7.45 billion. The Naperville, Ill.-based firm's share price closed Friday at $11.85, giving it a market capitalization of $5.2 billion.
That suggestion sent Tellabs' share price into overdrive in pre-market trading this morning, as it leaped by $2.15, more than 18 percent, to $14.00 before the markets opened, though that initial rise was soon tempered as investors began examining the deal's viability.
Tellabs says it "does not discuss its strategy or rumors on that topic for competitive reasons," while Nokia Siemens says it "can't comment on these sorts of rumors."
Tellabs will report its second-quarter earnings Tuesday, July 24, and can expect plenty of questions about its future from Wall Street analysts.
Tellabs, best known for its optical and fiber-to-the-home/node (FTTH/FTTN) business with the Tier 1 U.S. carriers, has been the subject of takeover speculation since major consolidation moves -- the merger of Alcatel and Lucent, the creation of the Nokia Siemens joint venture, and Ericsson's shopping spree -- began altering the shape of the telecom equipment landscape. (See Who's Going to Buy Tellabs?, Nokia, Siemens Create Networks Giant, and Alcatel, Lucent Seal Deal.)
Ericsson AB (Nasdaq: ERIC) was considered one of the more likely suitors as it had openly expressed its eagerness to muscle into the North American high-speed fixed-access market, where Tellabs, Alcatel-Lucent (NYSE: ALU), and Motorola Inc. (NYSE: MOT) were deemed the strongest players.
But instead, Ericsson, which began its M&A splurge in 2005 with the acquisition of Marconi, splashed its cash on fiber access specialist Entrisphere Inc. , a move that subsequently helped it land a significant deal with AT&T Inc. (NYSE: T). (See Ericsson Buys Entrisphere and AT&T Picks GPON Players.)
The Swedish giant has also bought edge router vendor Redback Networks Inc. and video processing equipment firm Tandberg Television , as well as some software specialists. (See Ericsson Offers $2.1B for Redback , Ericsson Lands Tandberg TV, Ericsson Buys Openwave Rival, Ericsson Snaps Up SDP Firm, and Ericsson Buys Billing Vendor LHS.)
That raft of acquisitions -- Entrisphere and Redback in particular -- has catapulted Ericsson from a bit player in the North American fixed-line equipment to one of its leading players. That has even been acknowledged by its keenest rivals, with Alcatel-Lucent's head of North America, Cindy Christy, noting during a recent presentation that her company's closest competitors in the U.S. market are now Cisco Systems Inc. (Nasdaq: CSCO) and Ericsson.
Now it would appear that Nokia Siemens Networks (NSN) wants to play catchup in North America and in fiber access technology, two markets where it currently lacks any significant presence.
Strategically, such a move would be typical of a major player in NSN's situation, says Heavy Reading chief analyst Graham Finnie. "Once the dust has settled, a lot of newly merged companies often feel the temptation to make acquisitions where they have holes in their portfolios," says Finnie.
It would also help NSN, which is strong in Europe and Asia/Pacific but weak in North America, achieve its ambition to be the world's leading telecom equipment player. Company spokesman Brett Young says the company, which began operations on April 1, has always stated that being the No. 1 vendor "is a priority, and obviously that's what we're striving for. Beyond that I can't say anything." (See Nokia Siemens Opens on a Downer.)
Tellabs would add an extra 10 percent or so to NSN's sales, based on 2006 numbers. If NSN had existed last year it would have generated revenues of €17.1 billion ($23.6 billion), while Tellabs reported net income of $194 million from revenues of just more than $2 billion in 2006. (See Tellabs Reports 4Q06.)
But analysts at Dresdner Kleinwort warn that such a move would likely result in "significant earnings dilution and integration risks," and would "essentially wipe out the remnants of Nokia's net liquidity" if a cash deal at the reported levels were struck.
In a research note issued Monday the Dresdner team noted that a deal of around $7 billion would "make earnings accretion exceedingly hard to produce. It would necessitate annualized cost savings of $400m, or revenue synergies of equal proportions, to allow for a 10 percent pre-tax return on investments [over three years]."
The analysts also noted that Tellabs "is widely seen as one of the victims of diminishing demand for long-haul optics and increased competition in the field of [fiber-based] broadband access," competition that, along with carrier consolidation-induced capex weakness, has hit Tellabs' numbers of late. (See Tellabs Earnings Drop on Access, Optical Mix Nips Tellabs Margins , and AT&T Vendors Sing Merger Blues.)
In addition, compared with the assets Ericsson has gathered up in the past few years, "Tellabs's product and technology position is arguably much weaker," and would cost more at the reported bid price, as Ericsson has spent about $4 billion to bolster its portfolio and market position.
Those concerns hung over Nokia's share price this morning, as it edged down $0.25, about 0.85 percent, to $29.03.
But while the mechanics of the reported takeover might not appeal to some investors, the truth remains that if Nokia Siemens is to elevate itself into the top tier of vendors in the North American market, it may have to make some unpopular, and perhaps even ugly, M&A decisions.
— Ray Le Maistre, International News Editor, Light Reading