Is Nortel the Old Maid in Telecom M&A?
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 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