Alcatel-Lucent merger casts spotlight on Nortel

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The acquisition of Lucent Technologies Inc. by Alcatel SA may trigger further mergers and acquisitions in the fiercely competitive communications technology sector, say industry insiders.

Some Canadian analysts cite Brampton, Ont., based-Nortel Networks Corp. as a possible prime target in the expected merger mania.

On Sunday, French behemoth Alcatel, agreed to buy its ailing rival Lucent Technologies of Murray Hill, N.J. in a US$13.4 billion stock swap creating a new industry giant with an estimated market capital of $36 billion. “Vendors north and south of the border will be looking at their competitors now wondering if they’re ripe for acquisition of if they themselves are being eyed for takeover,” said Carmi Levy, senior analyst at Info-Tech Research Group Inc. in London, Ont.

Another Canadian analyst, however, doesn’t believe the merger will significantly alter the Canadian telecom scene. “But from a Canadian perspective it does raise questions about the outlook for Nortel,” said Lawrence Surtees, vice-president and principal analyst for communications research of IDC Canada.

Surtees believes if a new round of consolidation does erupt, Nortel with its extensive “geographic breath and product line that’s top among its class makes it a jewel” in any suitor’s sight. “It’s not that Nortel is up for sale at the moment but you know what they say: everyone has a price.”

Yet another analyst cites Ericsson Inc. and Juniper Networks Inc. as viable takeover candidates – and Motorola Inc., Cisco Systems Inc. and NEC Corp. as possible acquirers. “You’ll see a lot of vendor consolidations both in Europe and the U.S., even Asia,” said Zeus Kerravala, vice-president for enterprise computing and networking at Yankee Group in Boston.

Kerravala says the Alcatel-Lucent merger makes the combined company a formidable threat to its competitors. That’s inevitable, he says, when “you take into account the new company – with $36 billion in market capital — is about half the size of Ericsson, one third of Nokia and about three fourths of Motorola.” The Alcatel-Lucent merger comes as “no surprise” to Roberta Fox principal of Fox Group Consulting. Head of the Markham, Ont.-based IT and telecom consulting firm says such unions “have been talked about for some time now because there are just too many vendors to make the business viable.”

Levy shares this view and says in this kind of environment companies will want to be the ones to make the first move before someone else moves in on them. “In this business it’s either kill or get killed. When a company buys another company they’re doing it to get there ahead of somebody else.”

He said the purchase by Alcatel was fortunate for Lucent. “Lucent has been on the ropes for years and had been looking for a buyer for sometime. It had been marginalized and in telecom there is no room for marginalized players”.

Both Fox and Levy believe the new round of acquisitions will probably be concentrated in the U.S. “Something tells me there are deeper pockets south of the border,” Levy said, adding that when bargain hunters from the south set their sights on Canada it’s hard to overlook Nortel.

Ian Grant, who heads the telecom research company SeaBoard Group of Toronto, said two of the possible alliances of the future could be Motorola and Ericsson followed by Cisco and Nortel. But he adds Nortel might have to pull itself up from its current problems” to be a more attractive prospect.

“Everybody seems to focus on Nortel’s continuing accounting woes. But the company has a lot to offer that any suitor will covet,” Surtees counters. Nortel’s expertise in wireless and optical technology is what would make it attractive to potential buyers, Surtees said. “The wireless and optical technologies are growth industries in telecom today. Because of its strength in these areas, Nortel remains a jewel in the business.”

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