Optical sector watchers are in virtually universal agreement about consolidation: It needs to happen, it's already started happening and more of it will happen. With a couple of deals announced in recent weeks, it's looking increasingly likely we could see a summer of love in the optical market, but who are the suitors, and who are the potential objects of affection?
Here's a handy guide to potential buyers and sellers based on nothing other than my own willingness to play guessing games:
Ericsson AB (Nasdaq: ERIC): BUYER. Sure, the Swedish giant recently downplayed any desire to follow Nokia Corp. (NYSE: NOK)'s acquisition bid for Alcatel-Lucent (NYSE: ALU) with a big M&A move of its own, but the Big E can't fools us. Ericsson historically has shown a nearly Cisco-like willingness to drive market consolidation, and I'm betting it makes an offer on a US player to (finally) get a stronger foothold in that market, and in particular a piece of the explosive web-scale segment. (See Ericsson Not Planning Big M&A Response to Nokia/AlcaLu, Ericsson Buys Telecom Biz of Chinese IT Firm, Ericsson Buys TimelessMIND OSS Assets and Ericsson Acquires Billing Vendor MetraTech.)
Cisco Systems Inc. (Nasdaq: CSCO): BUYER. I know -- duh. You can always say Cisco will be a buyer in any market -- SDN; WiFi; little pocket video cameras, for crying out loud -- and hardly ever be wrong. But, something tells me Cisco isn't going to let so many optical market inflections points -- metro, data center interconnection, software, IP+Optical convergence, just to name a few -- boil over without bolstering its position. It recently had a high-profile metro 100G win at Verizon, and could be in a mood to beef up its optical portfolio. (See Cisco: Don't Be Surprised At Verizon Optical Deal.)
Coriant : BUYER. A bet on history more than anything else. It's hard to say what gaps Coriant would be looking to fill with an acquisition -- it does have a pretty complete end-to-end optical story already. Maybe it would pursue a software-oriented acquisition, or one that would give it more leverage in the US market following its Tellabs deals? (See Tellabs' Last Hope: Marlin's Optical Ambition and Sycamore + NSN Optical = Coriant.)
Ciena Corp. (NYSE: CIEN): DRAW. Trying not to sit on the fence (ouch!), but Ciena is hard to figure. Some analysts have jumped on Ciena's partnership with Ericsson as the gateway to an acquisition by the Swedes. (This chatter started when the partnership was first announced, but has heated up again in the wake of Nokia's Alcatel-Lucent bid). A foreign buyer could gain some valuable business ties with AT&T and Verizon. Yet, Ericsson and Ciena have been pretty definite about where the lines are drawn in their partnership, and Ciena seems inclined toward independence, given the multitude of market segments simultaneously exploding around it... Either that, or Ciena's already sold its soul, and is just waiting for the ink to dry. (See Ericsson's Ciena Tieup: It's a Migration Thing.)
Infinera Corp. (Nasdaq: INFN): BUYER. Many people would rate Infinera more as a potential seller, likely to be absorbed by Ericsson if Ciena proves to be too stubborn. It's also true that before its Transmode Systems AB bid, Infinera hadn't acquired another company in a loooong time. But, I think this vendor, which so patiently waited for the market to catch up with its PIC and bandwidth innovations, is set to become more opportunistic about mining every segment as completely as possible, and not missing out on anything. It showed off a preferred taste for buying like-minded R&D-centric firms with its Transmode bid, so expect it to be just as picky and eclectic about its next purchase. (See Infinera Coming Closer to Mastering the Metro.)
MRV Communications Inc. (Nasdaq: MRVC): SELLER. Aside from rating Ericsson and Cisco as buyers, this is the easiest one on my list. A company in the midst of its latest of multiple turnarounds, MRV's packet optical story will develop more fully as this year plays out. In an interview I did with new CEO Mark Bonney a few months ago, he was open-minded about the possibility of being acquired -- or at least open to all options. I could see a buyer moving in because it agrees with MRV's product roadmap and likes its relationships with certain international carriers and web-scale companies, or maybe just the latter. (See MRV's New Refocuser Refocuses on Refocusing.)
Cyan Inc. : SELLER. No hardware firm on this list has pursued the software evolution so aggressively, and Cyan's Blue Planet software, with its engagements in so many carrier labs and trials, and finally some progress on actual contract wins, seems like the main thing any buyer would be after. Cyan also needed to seek out new financing to support ongoing operations as recently as late last year, so it might be financially motivated. (See CenturyLink Lands on Cyan's Blue Planet and Cyan Seeks Funding in SDN Squeeze.)
ADVA Optical Networking : SELLER. The German firm doesn't seem particularly interested in wanting to sell, but with Infinera looking to scoop up Transmode, which has some similar product and market strengths, ADVA would make nice quarry for a company looking for a stronger European presence, some metro and enterprise assets and security and network timing acumen. But, who fits that description? Ciena? Like certain other non-US vendors, it probably would love to have a much bigger presence in the US market, with so many Internet content providers based here. Maybe it helps its case by selling to a larger company that could better market its products here. Though, could ADVA also help its case here by becoming a buyer or investor, perhaps by going after the final company on this list? (See ADVA Eyes Advantages Amid Acquisitions.)
BTI Systems Inc. : SELLER. By calling BTI a seller, I'm also including the possibility the privately held company could pursue a long-rumored IPO -- which of course could turn it into a buyer overnight. Still, it doesn't seem like the IPO is coming anytime soon, and I'd bet BTI has fielded a number of acquisition offers in the last year or so. BTI, fairly or not, is seen as a pioneer in data center interconnection, and also, fairly or not, as the company with the most to lose as much bigger vendors stalk the same market segment. Why might a larger player buy them rather than try to beat them? Maybe because it wants a foothold with certain key web players, including Google, not that BTI has ever admitted to having Google as a customer. (See CEO Chat With Colin Doherty, BTI Systems, Is BTI Heading for an IPO? and Is Google Fueling BTI's Growth?)
There are a number of vendors I haven't mentioned -- Huawei Technologies Co. Ltd. , Juniper Networks Inc. (NYSE: JNPR), ECI Telecom Ltd. and Ekinops SA being just a few examples -- but not because I don't think they're important, or that they will stay on the sidelines as consolidation progresses. Heck, Nokia and Alcatel-Lucent may not even be finished as buyers, so let's just say the whole optical sector is in play.
What do you think? Am I way off in how I've chosen to identify the companies above? Please air your views in the comments section below, and feel free to post your own list of M&A candidates.
And let optical's summer of love commence!
— Dan O'Shea, Managing Editor, Light Reading