Life after Lucent: telecom feeding frenzy
How will Alcatel's proposed megadeal reshape the telecom landscape? Cisco might merge with Motorola, and a host of smaller companies will get snapped up.
By Om Malik, Business 2.0 Magazine senior writer

This story was originally published on March 26.

SAN FRANCISCO (Business 2.0 Magazine) -- The proposed merger of two telecom hardware makers, Alcatel and Lucent Technologies, is like the firing of the starting gun for an industrywide race to consolidate.

(Click here for the Alcatel-Lucent story.)

Whoever crosses the finish line first will have the upper hand in a vastly transformed telecom landscape. A vast number of smaller equipment makers will be swallowed up. And we might even see more megadeals, like Cisco (Research) buying Motorola (Research).

What's driving the runners forward? Primarily, it's the consolidation that has taken place worldwide in telecom service providers. There are fewer customers for hardware makers, and those who remain want to provide all telecom services: voice, data, and wireless services.

In the U.S., Verizon (Research) bought MCI; SBC bought AT&T (Research) and took its name, and is now in the process of buying BellSouth (Research) and taking control of Cingular Wireless; and Sprint (Research) merged with Nextel. In cable, Time Warner (Research) and Comcast bought Adelphia.

Similar deals have been taking place worldwide, like Spanish telecom Telefonica's recent acquisition of O2, a British wireless provider.

"This proposed deal is reflection of the resugence of the incumbents not only in the U.S., but worldwide," says Muayyad al-Chalabi, principal at Boston-based telecom consulting firm Adventis.

As the number of service providers continue to shrink, they have regained buying power and are squeezing out deep discounts from equipment suppliers.

At the same time, the industry is in the middle of a massive technological transition, going from old-fashioned circuit-switched networks to more advanced networks, geared for broadband, that use Internet protocols to offer a myriad of services includin video, voice, high-speed Internet access, and wireless.

That technological trend is also putting price pressure on hardware makers, because Internet gear is generally cheaper than the specialized equipment it replaces. And once a carrier has a capable Internet network in place, it can add new services like Internet television without having to spend much on more hardware.

Some observers are looking forward to a simplified telecom landscape.

"This (Lucent-Alcatel merger) could create a domino affect and I hope it does," says Pip Coburn, chief strategist and principal at Coburn Ventures, a technology investment advisory firm.

On the menu for the big guys will be smaller telecom equipment makers, especially those with expertise in narrow industry niches, like Ciena, Juniper, and Tellabs. Any one of those three would help a larger telecom maker expand its offerings of Internet gear.

So who are the buyers? Cisco, Ericsson, and Nokia are likely buyers now, says al-Chalabi, and in another six months, a resurgent Nortel could enter the market.

He thinks that Cisco needs to make a move into the wireless space, and it should try to merge with Motorola, because it would give the company a strong position in cell-phone handsets and network equipment.

Besides the price tag -- a market capitalization of nearly $56 billion -- one major hurdle here would be Cisco's recent $5 billion purchase of Scientific Atlanta, Motorola's chief rival in the cable-broadband equipment market. Antitrust concerns might force it to divest Motorola's broadband business.

Even then, Cisco would still have to make an acquisition in optical-networking equipment to fully compete with a merged Lucent-Alcatel.

Those would be pricy deals, but Cisco can't afford to sit still, with rivals entering the bidding for other potential buys.

Ericsson, Nokia, and even Nortel are in better shape than ever for making acquisitions, says Coburn, the telecom analyst.

Nortel's new CEO, Mike Zafirovski, until recently the No. 2 executive at Motorola, could be looking to bulk up his company's offerings.

On his menu could be names like Juniper, Ciena, Tellabs, Sonus Networks and Foundry Systems.

Mark Sue, analyst with RBC Capital Markets, thinks that Extreme Networks, 3Com, Redback Networks, Avaya, and UTStarcom, are all possible takeover candidates.

Earlier this month, the industry was abuzz with unfounded rumors of Ericsson buying Juniper. More recently, some have said that Siemens' communications division could be up for sale as well.

While no deals panned out, one thing is clear: The longer companies wait, the more expensive deals will become. The Nasdaq Telecommunications Index is already up more than15 percent from late December. This race could get costly fast. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.