Optical/IP Networks

Who's Going to Buy Tellabs?

Is Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) going to be the next company taken out in the telecom equipment world's continuing wave of consolidation? It has all the characteristics of an acquisition target, but analysts are split on who the best buyer would be, as most of the obvious names have some good reasons not to take the plunge.

Tellabs, like Nortel Networks Ltd. , risks being left out in the cold as gear vendors and telcos hook up and leave the dance floor. The logic is worrisome for mid-sized firms like Tellabs: Telcos are getting bigger and fewer and would seem likely to buy their equipment from bigger and fewer vendors.

So, with Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) merging, and Nokia Corp. (NYSE: NOK) teaming up with Siemens AG (NYSE: SI; Frankfurt: SIE), plenty of industry watchers are presuming companies like Tellabs need to get deals going as well. (See Alcatel, Lucent Seal Deal, Nokia, Siemens Create Networks Giant, and Post Nokia Siemens, Whither Nortel, Others?)

Tellabs, which employs about 3,700 people, reported $515 million in revenues for the first quarter of 2006. It has $3.5 billion in assets and a market cap of $6.37 billion. Its portfolio includes an edge router in the Tellabs 8800; optical technology including a reconfigurable optical add/drop multiplexer (ROADM); and the Tellabs 5500 digital crossconnect.

But perhaps Tellabs' strongest asset is its fiber-to-the-node (FTTN) and fiber-to-the-home (FTTH) equipment. Tellabs is the lead vendor at network rollouts for BellSouth Corp. (NYSE: BLS) and Verizon Communications Inc. (NYSE: VZ), and it's a presumed frontrunner in the GPON request for proposals (RFP) issued by the three U.S. RBOCs. (See Tellabs Demos GPON , GPON RFP Weighs In, and GPON Vendors Line Up.)

Who's up for taking on all that? Motorola Inc. (NYSE: MOT) and Ericsson AB (Nasdaq: ERIC) would seem the favorites for suitors -- on paper anyway.

Motorola happens to be from Tellabs' home state of Illinois, and it's got some gaps that Tellabs could fill nicely. Motorola "can seek to emulate Alcatel-Lucent by filling in the holes between connected home and mobile networks in its end-to-end IMS solution," Argus Research analyst Jim Kelleher writes in an email to Light Reading. "Those include access, routing and switching, and optical transport including ROADM."

Motorola could also see some cost savings during the process of actually combining operations, points out Merrill Lynch & Co. Inc. analyst Tal Liani in a recent note predicting a Motorola acquisition of Tellabs

But does Motorola really want all of Tellabs? Kelleher points out that Motorola would not improve its geographic presence very much with an acquisition of Tellabs. Both companies have largely North American customer bases.

Analyst Joe Chiasson of Susquehanna Financial Group finds Motorola an unlikely suspect. One theory he's heard is that Motorola, should it lose the RBOC GPON RFP, could use Tellabs as a backup -- but that's an awfully expensive backup. "I find it hard to believe they're going to go back in there and buy Tellabs just for another bite at the apple," Chiasson says. In a similar vein, Citigroup analyst Alex Henderson thinks Tellabs' FTTx suite might make it less attractive to some large and well diversified suitors. "As the North American market moves from BPON to GPON, we think Tellabs looks less attractive since potential acquirers like Motorola, Siemens, and Ericsson are all arguably just as strong or stronger in GPON technology," he writes in a recent note. The vendors "likely would want to wait until Verizon makes GPON choices before proceeding with any potential deal in this area," Henderson adds. (See Sources: Tellabs, Lucent Score ROADM Wins.)

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