Optical/IP Networks

Marconi Rises on Sale Talk

Continued speculation that (Nasdaq: MRCIY; London: MONI) is set to accept a takeover bid has sent its shares up more than 4 percent in morning trading on the London Stock Exchange today.

Weekend reports that a bid is due to be announced sent the vendor's share price up by 15 pence, more than 4 percent, to 360 pence (US$6.36). That represents a 20 percent rise in just one month -- Marconi's share price was 299 pence ($5.28) on September 23.

But a lot has happened since then. On September 27 Light Reading broke the news that (Nasdaq: ERICY) was considered by Marconi insiders as the most likely buyer, ahead of Chinese vendor Huawei Technologies Co. Ltd., long seen as a potential bidder. (See Sources: Ericsson Mulling Marconi and Marconi/Huawei Talk Reheated.)

Marconi has been looking for a buyer since it failed to win any next-generation network business from its biggest single customer, (NYSE: BT; London: BTA), in April this year. That news sent Marconi's stock crashing by nearly 40 percent, from 482 pence ($8.52) to 292 pence ($5.16). (See Marconi in Turmoil and BT Shuns Marconi for 21CN.)

But as various British newspapers speculate that a sale is imminent, Ericsson and Huawei are not the only names being mentioned. Now (NYSE: ALA; Paris: CGEP:PA) has been cited by The Sunday Telegraph as Ericsson's main rival for a Marconi acquisition. Not surprisingly, none of the companies are commenting on the issue.

Analysts have been quick to play down the Alcatel speculation, though. Per Lindberg at Dresdner Kleinwort Wasserstein notes the extensive overlap between the two companies, while the team at European brokerage Kepler Equities issued a research note saying they believe it would be "insane for Alcatel to bid."

Ericsson, which needs to bolster its fixed-line equipment arsenal, and which would benefit from Marconi's close relationship with BT, is regarded as the frontrunner. Some British media reports even suggest that Ericsson has already tabled a bid of around £750 million ($1.3 billion), roughly equivalent to Marconi's current valuation. (See BT Picks Ericsson for 21CN and Ericsson to Bring Partners to 21CN Party.)

Analysts at Lehman Brothers believe such a move could be positive for Ericsson, especially as it would give the Swedish vendor control of Marconi's optical portfolio, which it currently sells to its extensive base of mobile operator customers. Ericsson's ability to offer a full range of infrastructure equipment might suffer if a rival acquired Marconi, say the analysts in a recent research note.

Other benefits would come from Marconi's carrier relationships, especially with BT and (NYSE: TI), as well as Marconi's complementary developments in the next-generation IP DSLAM and softswitch sectors, reckons Lehman analyst Tim Luke, who believes Ericsson could fund a bid with cash or stock.

Ericsson announced its third-quarter results last week, reporting revenues of 36.2 billion Swedish Kronor ($4.54 billion) and a profit of SEK5.3 billion ($664 million). Its fixed-line sales accounted for just 3 percent of total revenues. CEO Carl-Henric Svanberg declined to comment on any potential bid during the company's conference call. (See Ericsson Reports Q3.)

Marconi, which reported a loss of £36 million ($64 million) from revenues of £285 million ($504 million) in its first quarter ended June 30, is due to announce its second-quarter numbers on November 3. (See Marconi Treads Water.)

Luke calculates that buying Marconi would push Ericsson's fixed-line equipment revenues from 3 percent of its total to about 12 percent.

The Lehman analyst adds that any company buying Marconi is likely to sell off the vendor's U.S. business -- formerly Fore Systems but now known as Marconi's Data Networking unit -- which sells large switches to the U.S. government. Local media reports in Pittsburgh, where the unit is based, believe U.S. vendors would be interested in securing that federal business. (See Marconi Wins Fed Switch Contract.)

— Ray Le Maistre, International News Editor, Light Reading

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