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Nortel Goes to Washington

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News Analysis
Light Reading
4/26/2005

Nortel Networks Corp. (NYSE/Toronto: NT) today signed a $448 million deal to acquire IT services firm PEC Solutions Inc. (Nasdaq: PECS) in an attempt to win a slice of the lucrative U.S. government market (see Nortel to Acquire PEC)

Based in Fairfax, Va., PEC Solutions provides a range of technology services to federal, state, and local governments in the United States. These include systems design, management, and even a portfolio of biometric security products.

It's quite a departure for Nortel, but it provides a big hint as to how the company sees itself growing after years of poor business in the telecom market -- and its own self-inflicted accounting problems.

Rebecca Segal, an analyst at IDC believes that this could, potentially, form the basis for a much broader services offering from Nortel, possibly even targeted at the enterprise.

"If this is a model that they could replicate, then it could be a way into the IT services industry," she says. "It depends on how much integration there is between PEC and Nortel."

Either way, it makes sense for Nortel to attack the U.S. federal government market first. Over recent years, Washington has become something of a cash cow for vendors smarting from the global economic slowdown. Washington has been steadily overhauling its technology as departments and agencies scramble to build new networks.

”If you look at who is spending money on IT, the biggest growth sector is the government,” says Jon Oltsik, senior analyst at the Enterprise Strategy Group. “Nortel is looking for some professional services to lead the way into that space.”

Although Oltsik thinks that PEC’s services are unlikely to spill over into Nortel’s enterprise business, stranger things have happened. The IBM Global Services behemoth, for example, has offerings for both businesses and governments, with an entire business unit focused on homeland security.

"Everybody is following IBM's lead, but you have got to understand that government contracting is very different to private sector contracting," warns Andy Efstathiou, program manager at analyst firm The Yankee Group.

Efstathiou believes that this could indeed be a building block for Nortel, with government-tested security services, in particular, a good fit with the private sector.

So, why has Nortel decided to make its move now? Could it be because archrival Cisco Systems Inc. (Nasdaq: CSCO) is already getting into bed with a number of systems integrators in the government sector?

Cisco has already established a Global Government Solutions Group, which is focused on both government customers and developing solutions for systems integrators.

So, which technologies are likely to be key? “It’s pretty much across the board,” says Oltsik. “It’s telephony, data networking, security, optical networking -- it’s everything.”

There are also similarities between current trends in the enterprise and government. “The network [in both sectors] is undergoing a fundamental change, where it has to be more application aware, more secure, and more identity driven,” says Oltsik.

The Canadian firm gave a hint of its government aspirations last year during its managerial merry-go round. Nortel named former Canadian deputy prime minister John Manley as a company director, taking the board seat vacated by former CEO Frank Dunn.

The Nortel/PEC deal is expected to be completed in June.

How is the Government side of your business going? Why not tell us all about it by taking the latest NDCF poll: Pork City Payouts.

— James Rogers, Site Editor, Next-Gen Data Center Forum

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