Optical/IP Networks

Arris, Redback Top Merger Scorecard

It's fun to talk about Nortel Networks Ltd. and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) getting acquired, but when you line up the major telecom gear companies that might get bought, they're at the bottom, according to one analyst's tally.

Instead, it's Arris Group Inc. (Nasdaq: ARRS) and particularly Redback Networks Inc. that ought to be in someone's sights for a purchase, according to Joe Chiasson of Susquehanna Financial Group .

That insight in itself isn't unique; in fact, quite a few analysts tell Light Reading that Nortel's chance for a major acquisition has passed. (See Is Nortel the Old Maid in Telecom M&A?.) Incidentally, Nortel CEO Mike Zafirovski has said he wouldn't be interested in a deal anyway.

What makes Chiasson's analysis fun is that he's tallied some numbers to show which companies are the belles of the ball, publishing the results in a note late last week. He ran numbers in three categories, scoring each one on a scale of 1 to 10: scarcity (does the company make something no one else does?), relevance (how well the company fits in carriers' capex plans for the next few years), and feasibility and/or ease of integration.

All this merger talk comes in the wake of two big deals: Alcatel (NYSE: ALA; Paris: CGEP:PA) merging with Lucent Technologies Inc. (NYSE: LU), and Nokia Corp. (NYSE: NOK) forming its equipment joint venture with Siemens AG (NYSE: SI; Frankfurt: SIE). The heft these companies gain in joining forces could give them an advantage in serving telcos -- which, themselves, are consolidating -- and that's leading some to wonder if competing gear providers should be chasing big-ticket acquisitions, too. (See Alcatel, Lucent Seal Deal, Nokia, Siemens Create Networks Giant, and Post Nokia Siemens, Whither Nortel, Others?.)

Redback kicked butt, tallying 28 of a possible 30 points. It ties in to the all-IP mantra being tossed about, and it's the right size for a big company to consider purchasing. Ericsson AB (Nasdaq: ERIC), Motorola Inc. (NYSE: MOT), and Nortel could all be interested, as could Nokia/Siemens, Chiasson theorizes.

Arris scores second with 24 points, 10 of them in the "feasiblity" category because of its size. "Only [Cisco Systems Inc. (Nasdaq: CSCO)] and Motorola have any material CMTS market presence besides Arris, and they are not for sale," Chiasson writes. Alcatel, Motorola, Nortel, and Siemens could be looking Arris's way, he writes.

Everybody else is pretty much tied with 16 to 19 points. Juniper Networks Inc. (NYSE: JNPR) ranks third, although Chiasson notes Juniper's management "will be an impediment to getting a deal done."

"Redback’s attractiveness probably also diminishes the likelihood of Juniper being acquired given the disparities in their market capitalizations, and the fact both companies would attract buyers with the same underlying motivation; namely, to get an Edge," Chiasson writes.

Adtran Inc. (Nasdaq: ADTN), Ciena Corp. (NYSE: CIEN), Sonus Networks Inc. (Nasdaq: SONS), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and Tekelec make up the rest of that middle-to-low cluster. Sonus's score is surprisingly low; that's because the company scores badly in the "scarcity" category, Chiasson notes. Ciena by its "heavy optical and access/DSL slant," he writes.

Tellabs is penalized for its $6.5 billion market capitalization, but Chiasson's report reiterates his longshot theory that Cisco might take a flier at the company. (See Who's Going to Buy Tellabs?.) Ericsson might see Tellabs as a way to obtain access network equipment and get closer to Cingular Wireless and T-Mobile US Inc. , he adds.

And bringing up the rear is Nortel, scoring just 1 out of 10 in "feasibility/ease of integration." The company is huge and comes with pension obligations; moreover, it's bound to have serious product overlap with just about anybody that buys the entire company, Chiasson notes. Cisco or Motorola might have an interest in some of Nortel's wireless technology, he adds.

— Craig Matsumoto, Senior Editor, Light Reading

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