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Is Nortel the Old Maid in Telecom M&A?

Craig Matsumoto
6/29/2006

Speculation about a merger partner for Nortel Networks Ltd. has cooled significantly, with many analysts thinking "none of the above" is looking like the right answer.

Talk of potential acquisitions accelerated in April, when Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) got betrothed, and Nortel's was among the names bandied about as both buyer and seller.

But now that Nokia Corp. (NYSE: NOK) has taken up with Siemens Communications Group in a joint-venture deal, the merger options for Nortel are looking bleak, analysts say. (See Alcatel, Lucent Seal Deal and Nokia, Siemens Create Networks Giant.)

"Nortel's run out of partners, and this is going to force them to do what they should have all along, and that's to become smaller and more focused," says analyst Tim Daubenspeck of Pacific Crest Securities Inc. "Strangely enough, that might mean becoming more of an enterprise/VOIP player."

CEO Mike Zafirovski isn't behaving like a merger candidate anyway, as his new plan for Nortel is taking shape. He's repopulated the executive ranks, filling the final link of a CTO just last week. And yesterday, Nortel announced layoffs of 1,900 -- part of an effort to "flatten the organization," according to the press release -- and hirings of 800 operations personnel. (See A Roese Is a Roese Is a New CTO and Nortel Cuts 1,100 Jobs.)

Zafirovski's efforts would seem to indicate Nortel wants to go it alone, continuing what he's described as a three- to five-year turnaround effort.

Nortel officials wouldn't comment on whether the company will or won't join the merger mania. "As we have outlined, we continue to drive our business forward in this environment with a renewed focus on execution and operational excellence," a spokeswoman wrote in a statement to Light Reading.

The pressure to merge comes from those who fear that standalone companies like Nortel won't have the heft to compete with the newly crafted giants of Alcatel/Lucent and Nokia/Siemens. That fear is particularly strong in wireless, where Nortel and others face the danger of getting shouted down by Ericsson AB (Nasdaq: ERIC) and Nokia/Siemens, which will dominate as the top two 3G providers by market share. (See Post Nokia Siemens, Whither Nortel, Others?)

A partnership with Siemens Communications would have done the trick, according to analyst Inder Singh of Prudential Equity Group LLC . In a note issued in April, he outlined how the combined companies would exceed 20 percent market share in enterprise telephony, wireless, optical, and next-generation switching -- 20 percent being Zafirovski's goal for any of Nortel's markets.

But Nokia's announced joint venture with Siemens killed off that idea -- and might have taken out Nortel's best hope at any large-scale deal.

Nortel, with its market capitalization of $9.2 billion, would be an expensive buy. And unlike middle-tier players like Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which many consider an acquisition target, Nortel is too broad to be attractive to most takers as a whole. (See Who's Going to Buy Tellabs?)

Big players like Ericsson or Huawei Technologies Co. Ltd. "have product portfolios as broad or almost as broad as Nortel has. Why would a company like that pay $10 billion for a portfolio that's that broad and less than spectacular?" says Joe Chiasson, an analyst with Susquehanna Financial Group .

Motorola Inc. (NYSE: MOT) has been bandied about as a possible buyer, but its wireless efforts combined with Nortel's still wouldn't amount to much of a challenge to Nokia/Siemens. "If you put those two together, you're still not a major player," says Pacific Crest's Daubenspeck.

What if the buyer comes from outside telecom -- someone like General Electric Co. (NYSE: GE)? That's a possibility floated by analyst Duncan Stewart of Orion Securities Inc. in a recent note. Stewart notes that Zafirovski was with GE for 25 years, and he's poached a few new Nortel executives from GE ranks. (See Zafirovski Adds Another GE Exec to Nortel.)

He's also partly kidding. "OK -- I do not think the odds of GE taking a run at Nortel are all that high," Stewart writes. "But the odds of someone doing so are almost certainly higher than the 0 percent most investors are assuming."

The enter-prize
The better option for Nortel, many think, is to pick and choose the markets that would help it thrive as a smaller company. As Daubenspeck mentioned, enterprise and VOIP might be areas to focus on.

"They've got to put a stick in the ground and say they're not going to be all things to all people," says Chiasson, who noted in late May that Nortel wouldn't likely find a buyer.

Even if Nortel focuses on enterprise, it might end up selling off some pieces, Singh concluded in a recent note. Nortel has amassed less than 1 percent share in Layers 4 through 7 networking, making no dent against Cisco's leading market share, and it has been "unable to defend its market share" in applications switches, although it maintains a No. 2 position there, Singh wrote.

Separately, Nortel could strike up some more joint ventures to cover weak spots. In fact, Nortel is rumored to be considering a three-sided JV with Avaya Inc. and Siemens, aimed at the enterprise voice market. (See Sources: Siemens, Nortel, Avaya Mull JV.)

But joint ventures are tricky to manage, as analysts like Singh have noted, and Nortel's recent history there is mixed. A joint venture with LG Electronics Inc. (London: LGLD; Korea: 6657.KS) in Korea appears to be working well, but Nortel and Huawei recently scrapped their joint venture, and a Nortel deal with China Putian didn't work out either. (See Nortel's Owens: Krazy About Korea, Nortel, Huawei Kill JV, and Nortel Suffers China 3G Setback.)

— Craig Matsumoto, Senior Editor, Light Reading

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Michael Harris
Michael Harris
12/5/2012 | 3:50:15 AM
re: Is Nortel the Old Maid in Telecom M&A?
M&A is good business for the bankers that's for sure.
Hey, even LR got into the act this month buying into cable. Maybe this is a contagious condition?
Belzebutt
Belzebutt
12/5/2012 | 3:50:15 AM
re: Is Nortel the Old Maid in Telecom M&A?
Wow, analysts are just desperate to see mergers nowadays, and they just assume it'll be a benefit to the company.

PS. NT is #1 in optical again. Good thing the analysts aren't running the company.
optiplayer
optiplayer
12/5/2012 | 3:50:12 AM
re: Is Nortel the Old Maid in Telecom M&A?
I don't think there is one technology for NT. If you look at where they are strongest - carrier VoIP, enterprise VoIP, certain segments of optical and CDMA - none of them is large enough "base" a company the size of Nortel on. They need to maintain or improve these businesses, jettison some underperfomers and try to catch the next wave of investment (be it 4G or whatever else).
Pete Baldwin
Pete Baldwin
12/5/2012 | 3:50:12 AM
re: Is Nortel the Old Maid in Telecom M&A?
So, let's say you ran Nortel, and you were taksed to turn it into a solid standalone company. What's the one technology you'd base the new Nortel on?

The idea here is that you'd get to keep various pieces of Nortel -- but that you want to find ONE that's going to be the flagship.

We've got the comment that Nortel is #1 in optical now, but ... does that really mean much? You can't base the new company on optical, IMHO.
jepovic
jepovic
12/5/2012 | 3:50:10 AM
re: Is Nortel the Old Maid in Telecom M&A?
"I don't think there is one technology for NT. If you look at where they are strongest - carrier VoIP, enterprise VoIP, certain segments of optical and CDMA - none of them is large enough "base" a company the size of Nortel on. They need to maintain or improve these businesses, jettison some underperfomers and try to catch the next wave of investment (be it 4G or whatever else)."

****************************

Plus, there are very little synergy between these areas, both in terms of customer needs and in terms of internal competence and R&D.
High-Tide
High-Tide
12/5/2012 | 3:50:09 AM
re: Is Nortel the Old Maid in Telecom M&A?
Although an interesting exercise - it is not realistic. Nortel has a broad portfolio with synergy across product lines. There are only two tier-one companies in the world today that have a broad portfolio spanning both Carrier and Enterprise - Nortel and Cisco. Both companies are weak in the other's area of dominance. Both are working hard to change that.

Although Nortel has not fully capitalized on our breadth, specifically the level of synergy we should be delivering - there is certainly a base level. To give that up would be to destroy the essence of the company, and in my opinion, relinquish our destiny.

Nortel's relevance has been called into question by analysts who are totally focused on financial performance, and clearly do not understand the value of the company's technologies. Nortel's technological capabilities are considerable, with sales of 10 billion, yet many analysts believe we cannot compete. This is maddening G thankfully expressed by the previous posters to this thread. Mergers and acquisitions G in my years I have seen only a few bear fruit.

The problems Nortel has struggled with over the last five years were often the result of poor decision-making on the part of our executive leaders in a very difficult industry climate. Cronyism was apparently more important than effectiveness when leaders were selected. Owens started the changes, and now Zafirovski has torn the head off the monster and infused the cabinet with aggressive, experienced talent. These executives are world-class and not inclined to accept failure. As a result, there is a new vision that is transforming Nortel literally at every level of the company - positive changes are occurring every day.

Most refreshing is management's refusal to be marginalized by competitor rhetoric or swayed by analyst failure to understand the business and what is required to succeed. Just because your best friend gets married, does not mean you should rush to the alter.

I was pleased to hear Mike Z's statement today that Nortel need not merge with anybody to succeed. We have most of the tools required in-house already. We simply need strong management with the vision and confidence to lead, make the proper portfolio investments, and drive the synergy that brings greater value to customers. Nortel has been artificially suppressed by the distractions of the past G those distractions are essentially behind us.
paolo.franzoi
paolo.franzoi
12/5/2012 | 3:50:08 AM
re: Is Nortel the Old Maid in Telecom M&A?

Craig,

If it were me, I would abandon the telecom market as fast as possible. Systems suppliers are being eaten alive by having to take massive development risks for a few opportunities at low margins. That does not seem to be changing for the near to mid term.

Defense Electronics, BioTechnology, or Alternative Energy would be better industries.

So:

Step 1: Sell all the businesses I can
Step 2: Run the rest of them into the ground to maximize cash
Step 3: Find a good business in my new industry and buy it

seven
inauniversefarfaraway
inauniversefarfaraway
12/5/2012 | 3:50:08 AM
re: Is Nortel the Old Maid in Telecom M&A?
Although completely unrealistic, here is one possibility that marries the best of both companies:

For Nortel, it would be to put the middle and senior management in the unemployment line. Anything above first line management that doesn't do technical but is great at "extracting" and manipulating. Restore the technical supremacy instead of maintaining the stranglehold of tyrannical management, or the "wither on the vine" attitude. "Nortel is it's own worst ennemy": truer words were never spoken.

For Cisco, keep the management and the system level folks, but put all the "headcount" that made vc's rich in the same line as the Nortel management.

Thus we have the best of both worlds, fabulous hardware that does more that ring your phone, and with a technology capability that Cisco never got. It's okay to buld robustness into the network, but why not embrace the genius of the and instead of the tyranny of the or.

Nortel management is not the greatest, while Cisco could do better, since it is running out of being able to buy small to advantage, and is lumbering under it's size with a mosaic of gear.

You have a company that can go after datacom and telecom as well as build new and fun things.
lightreceding
lightreceding
12/5/2012 | 3:50:08 AM
re: Is Nortel the Old Maid in Telecom M&A?
Nortel could come out ahead in the long run if they do have fresh management and are not bogged down by a merger. Mergers and acquisitions do bring down productivity in a big way. But if they do in fact have good products they had better fix their marketing.

It will be interesting to see what happens with Alcatel and Lucent. They are both huge political messes. Lucent is an inert mass run by old school management that destroyed every acquisition they made. When Lucent acquired Ascend it didn't take long before Ascend was no more.

Alcatel has groups in Paris, Antwerp and Kanata vying for control. The data networking group based on five previous acquisitions went away once Newbridge was acquired back in 2000 and those products died. The Newbridge acquisition seems to have been successful. They have had some success with the Timetra acquisition. But who knows what is next for them.

In any case the market changes fast and todays big seller is tomorrows relic and the big question for startups and incumbents is what to invest in next. If we knew we might be rich and doing something other than occupying a cubicle and reading LR.


laser_lover
laser_lover
12/5/2012 | 3:50:04 AM
re: Is Nortel the Old Maid in Telecom M&A?
MikeZ needs to extend and continue the purge of the dead-weight middle management layers. These folks do nothing but look after their empires and their buddies. One layer down are the 'architects' who KNOW their pet technologies are the solution to everything. (Watch out for these guys)

Then decide what you want to do, and do it. Get a group of good people together, figure out what you want them to build, give them a year or two mandate, and let them run.

You can't build a product if your people aren't committed.

They can't be committed if they're only employed one quarter at a time, looking over their shoulder every day for the reaper.

They can't be committed if they see senior management losing interest after six months.

They can't be committed if they see the same management fuckups being shuffled around instead of axed when things go wrong.

Neptune was a typical example. They wasted a couple of years and more than a few dollars and then decided not to bother. Nortel needs a routing platform. So get serious about it. Buy it or build it, but quit fucking around.

LL
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