SBC/AT&T: How Painful for Vendors?
The good news: Because of the nature of SBC’s and AT&T’s networks, the vendor overlap won't be as great as it would if the two carriers were direct competitors. “Our view is based on our experience with merger activity historically -- carriers tend to slow down capital spending as they work to integrate two separate networks and organizations,” says Jefferies & Co. analyst George Notter.
The historical assumption is that the merged company will immediately begin eliminating “redundant” purchasing throughout the organization, a few vendors out in the cold. SBC officials said in a conference call Tuesday that capex spending would be “more efficient,” which probably means “less.”
Analysts say this may not be the case with SBC/AT&T. “There is not a huge amount of commonality between the two networks,” says Pacific Growth Equities Inc. analyst Joe Noel. “They have sort of divvied up the world, so there may not be as much disruption as people think.”
Because of the “separateness” of the two networks, SBC may not be in much of a hurry to integrate them. “AT&T and SBC’s networks are likely to be managed and operated as separate networks for some time before the detailed network integration plan gets clarified,” says Lehman Brothers analyst Tim Luke.
But there may still be problems in the interim. “I don’t think there will be less spending; I think the bigger issue will be delays,” Noel says. “If you [equipment vendors] had something in the pipeline for approval for the end of 2005 -- that could easily get pushed back.”
The delays might be caused by SBC reassessing its strategic options in the wake of the merger, but delays, Noel points out, can be caused by operational things as well. He paints a scenario where an equipment vendor waiting for a purchasing order to be signed finds that the finance people who would normally have done so have been laid off or reassigned to another part of the company. SBC said 13,000 people will be let go as a result of its acquisition of AT&T.
Lehman Brothers’ Luke points out that most of the vendors his firm follows have supplier relationships with both SBC and AT&T. He lists Juniper Networks Inc. (Nasdaq: JNPR), Foundry Networks Inc. (Nasdaq: FDRY), and Polycom Inc. as examples of companies that will see little or no impact on sales from the acquisition.
Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), on the other hand, has a relationship only with AT&T -- the source of 80 percent of its revenue over the past two years. Luke reserves judgment on the exact risk to Avici, pointing out there is still a lot to be learned about the eventual combined SBC/AT&T network.
Luke says the merger is “slightly negative” for Cisco Systems Inc. (Nasdaq: CSCO). “The incumbent networking provider to both carriers may see its sales opportunities to the combined carrier somewhat negatively impacted as the carriers consolidate their IP networks.”
Another AT&T supplier that may actually profit from the acquisition is VOIP equipment provider Sonus Networks Inc. (Nasdaq: SONS). In Tuesday’s conference call, SBC implied that it would default to the AT&T VOIP product, CallVantage, because it is “further ahead” in development.
Due to the size of the two networks involved, it shouldn’t be a surprise that the net effects on equipment vendors should play out over years, not months.
“At worst case, the combination of the two entities might have a one percentage point negative impact on a 2005 capital spending budget that otherwise should grow in the mid-single digits,” Notter says.
“For 2006, we expect that the combination will have a more noticeable negative impact -- perhaps two points off of a low single-digit capex growth rate for next year.”
— Mark Sullivan, Reporter, Light Reading