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