Why Huawei Should Buy Nortel's MEN

If Huawei Technologies Co. Ltd. isn't already talking to Nortel Networks Ltd. about acquiring the latter's carrier Ethernet and optical assets, AKA the Metro Ethernet Networks (MEN) division, I want to know why not. (See Nortel to Sell Carrier Ethernet, Optical Biz.)

The Chinese vendor has been growing steadily each year and is now (in 2007) a $12.5 billion revenues business, and predicting further growth. But it's still not up there with Alcatel-Lucent (NYSE: ALU), Cisco Systems Inc. (Nasdaq: CSCO), Ericsson AB (Nasdaq: ERIC), and Nokia Networks .

If it's serious about going head-to-head with that quartet, it shouldn't hesitate to visit Nortel's HQ and wave its dollars in front of Mike Zee's nose.

The move would make total sense, and here's why:

Huawei is desperate to break into the North American market, and is constantly looking for any way to do that. Acquiring Nortel's MEN division would give it a strong foothold in the U.S. and Canada on which it could develop its business. (See Huawei's Plan B?)

The two companies have "history," as they were close to becoming broadband buddies a few years back, though their planned access equipment relationship, which was to be focused on North America, fell apart before it was consummated. (See Nortel, Huawei Kill JV.)

Huawei is already a major player in the optical market, but lacks some of the cutting edge developments that Nortel has in-house, according to Heavy Reading analyst Sterling Perrin. In fact, a Heavy Reading survey of carriers showed that Nortel is ranked among the leading companies in 40G/100G developments, while Huawei ranked very low. Buying MEN would give Huawei market muscle and make it a technology innovator, a position that would scare the pantalon off Alcatel-Lucent (NYSE: ALU), among others. (See Heavy Reading Homes In on Huawei.)

Every leading vendor should harbor the ambition to be a major player in the carrier Ethernet market. Combining Nortel and Huawei's carrier Ethernet businesses would give the Chinese vendor a greater presence in the market, where both companies have pledged their support for PBT (Provider Backbone Transport). (See Huawei Joins PBT Fan Club, Nortel: There's More to PBT Than BT, and A Guide to PBT/PBB-TE.)

Huawei has the financial muscle to make the acquisition and build on it. And in the current economic climate Huawei would be in a good position to negotiate on price. (See Huawei Reports 2007 Revenues of $12.5B.)

It would add another $1.5 billion or more to Huawei's annual revenues, and the Chinese vendor would likely be able to make the MEN division consistently profitable.

This is a move that makes total sense for Huawei. Expect to see the Chinese vendor at least check out the potential for such a deal, which could, of course, run into some regulatory barriers and, of course, some potential competition that won't be keen to see Huawei get its hands on Nortel's MEN.

— Ray Le Maistre, International News Editor, Light Reading