Optical/IP Networks

Where Have the Big Deals Gone?

In the past year, the market capitalizations of telecom equipment giants such as Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent Technologies Inc. (NYSE: LU) have dwindled to the point that they are starting to seem like -- gulp! -- takeover targets. The big question is: Who would want to buy them?

The big European equipment vendors -- Siemens AG (NYSE: SI; Frankfurt: SIE), Nokia Corp. (NYSE: NOK), Alcatel SA (NYSE: ALA; Paris: CGEP:PA), and Ericsson AB (Nasdaq: ERICY) -- appear to be the only likely suitors these days.

Alcatel, Nokia, and Ericsson have been regularly shopping around the United States for potential aquisitions, say many VCs and executives at optical networking companies. In fact, the latest rumors have Ericsson talking to Lucent about a high-level partnership of some sort. And Alcatel is known to be on the prowl for a metro Ethernet equipment provider. The last large potential deal, a possible Alcatel/Lucent merger, fell apart in the spring (see Alcatel, Lucent Throw in the Towel).

What puts the European players in a strong takeover position? Their share prices have been a little more stable than their American counterparts, and they are fortified with strong cash positions. And for them, a buy in the U.S. would help them expand their U.S. presence while beefing up their optical networking portfolios. Indeed, one of the only equipment acquisitions -- and one of the biggest deals of the year -- was Nokia's purchase of Amber Networks in July for about $400 million (see Nokia Nabs Amber for $421M).

"The Europeans are able to do a deal because they're really just government entities and they don't need to worry as much about their stock price," says Peter Wagner, a partner at Accel Partners which had invested in Amber Networks. But Wagner adds that things are grim for many large companies, especially in North America. "So many people have to take care of things at home, how could they possibly buy anyone?"

If not a European vendor, then how about Cisco? Apart from its Cerent-related business, the company hasn't made any outstanding inroads into the U.S. carrier market. But while Cisco has enough money to go after a Nortel or Lucent, its CEO, John Chambers, told a group of journalists this week that it was "not in the cards for [Cisco] to acquire large companies," according to a Reuters report.

That seems surprising, considering Cisco's acquisition appetite in the past. "If you had the guts right now you could own the carrier marketplace," says Roland Van der Meer, general partner and founder of ComVentures. "I'm surprised Cisco is not doing that -- they are pulling back from the carrier marketplace."

Table 1: Largest Telcom Equipment Deals, 1995 to 2001
Announced Date Bidder Target Approx. Deal Size (in billions of dollars)
Jan. 13, 1999 Lucent Ascend Communications Inc. 23.80
Feb. 23, 2000 Alcatel SA Newbridge Networks Corp 7.40
Aug. 26, 1999 Cisco Systems Cerent Corp. 7.20
June 15, 1998 Nortel Networks Bay Networks Inc. 6.67
Aug. 31, 2000 Lucent (Shareholders) Avaya Inc. 6.38
July 28, 2000 Nortel Networks Alteon WebSystems Inc. 4.80
May 5, 2000 Cisco Systems ArrowPoint Communications Inc. 4.80
May 31, 2000 Lucent Chromatis Networks 4.50
April 22, 1996 Cisco Systems Stratacom Inc 4.30
Oct. 18, 1999 Nortel Networks Clarify Inc. 3.87
Dec. 15, 1999 Nortel Networks Qtera Corp. 3.58
June 4, 1998 Alcatel SA DSC Communications Corp 3.23
March 14, 2000 Nortel Networks Xros Inc. 3.10
Feb. 6, 2001 Nortel Networks JDS Uniphase Corp (Zurich facilities) 3.00
Aug. 10, 1999 Lucent International Network Services 2.82
Feb. 7, 2000 Lucent Ortel Corp. 2.50
Dec. 20, 1999 Cisco Systems Pirelli SpA (Terrestrial optical systems business) 2.15
Source: Dealogic
(Excludes buybacks and withdrawn deals. Values determined using stock prices for the day each merger was completed. Chart only includes deals by Alcatel, Cisco, Lucent, Nortel, and Marconi.)

Big merger rumors make for interesting speculation, but the likelihood of one happening is remote.

Sure, Nortel's realignment, which put its chief financial officer, Frank Dunn, in the CEO seat, introduced some speculation that the company might be eyeing a merger. But most see Nortel's CEO choice as a clue that Nortel is focusing on saving money and guiding the company through a Bear market, rather than shopping it around.

"Getting rid of non-core businesses may be an indicator of an attempt to consolidate, but [Nortel's] having a CFO as a chief executive might just suggest a strategy of fiscal containment," says Brian Kinard, a general partner at Blueprint Ventures.

That's not to say that a big merger can't happen. Under the Bush administration, the Department of Justice is more lenient towards corporations, and the regulatory hurdles for big mergers are now lower than they've been in years.

Also, if there's ever been a good time to get rid of businesses that would impede a big merger, it is now. As carrier spending forecasts plummet, Wall Street continues to be bullish on equipment company cost cutting.

Rather than combine with another firm, there are other ways for companies such as Nortel to remain competitive. One analyst suggests that Nortel should split its wireline and wireless businesses and let shareholders determine which piece is more valuable. "Almost all other wireless equipment companies are independent of wireline operations," he argues. "Wireless and wireline companies are on different economic cycles, they have different technological attributes, and they should have different valuations."

That said, Wall Street is rewarding slimmer, trimmer companies. Not troubled behemoths with overlapping products.

What might happen instead of a merger of equals, say venture capitalists, is vertical combination of companies -- say, a component supplier and a systems vendor.

Most likely, though, is that companies will wait until the markets have been stable for a while before attempting any sizable combination. "Equipment companies are sticking to trying to get their ships righted, bailing water, and plugging leaks," says one financial analyst who covers Nortel. "Once they're stabilized, which will take several months, then they'll begin to think about growth, and that's when they might start looking at deals."

- Phil Harvey, Senior Editor, and R. Scott Raynovich, Executive Editor, Light Reading
HarveyMudd 12/4/2012 | 7:45:05 PM
re: Where Have the Big Deals Gone? From experience we know that too many foprign companies such as Nortel and Alcatel have incurred very substantial losses in acquring the US companies.

Of all the US companies, Lucent is the weakest one. It simply not a candidate for acquisition. The best thing is to license the technology from the US companies, if they have any, and decouple manufacturing and development activities in their own homelands.

The cost of acquiring any company should be carefully evaluated and should be based on the sales figure. Many companies misrepresent their potential in order to be acquired. For example, Alteon, Bay Networks, and many other companies have broght down Nortel. It should be mentioned that the Silicon Valley companies cannot be trusted and should be avoided.

In summary the key is licensing technology rather than acquiring companies.
rtfm 12/4/2012 | 7:45:05 PM
re: Where Have the Big Deals Gone? Doesn't it seem like the list of big buyouts is missing lots of big mergers/takeovers, e.g., JDSU, Sycamore buying Sirocco for 2.9 Billion in mid 2000, etc.?

Someone should make a comprehensive list of these, and then compare these to current values (given by sale prices or stock values) of the deals.

flamingo 12/4/2012 | 7:45:02 PM
re: Where Have the Big Deals Gone? ciena & juniper -
guru 12/4/2012 | 7:45:02 PM
re: Where Have the Big Deals Gone? csco could buy cien and onis for 7 or 8 billion. they are currently valued at 4B and 800M respectively. That would be a very smart move for the optical/carrier and metro side of the house. They could always add some other startups for 100-500M to fill in the gaps.
ghein 12/4/2012 | 7:45:00 PM
re: Where Have the Big Deals Gone? Where did you get that analyst who said that most wireless and wireline companies are separate? Lucent, Siemens, Alcatel, Nokia, Ericsson.. yeah they have either a wireless or a wireline business but not both!

The only difference between wireless and wireline is in the access portion. Has this guy even seen the carrier and vendor architectures for future networks? What does he think "all one network" or "all IP" mean?

While some companies have more sales in one area or the other, they all are chasing both segments and are producing equipment (or want to ... Nokia doesn't make much infrastructure for either network). If you're going to quoe an analyst, try to make sure he gives you something that makes sense (nice of you hide the names of the ignorant).
Sign In