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Alcatel-Lucent: Last megadeal in networking?

Smaller buyouts could multiply amid competition in telecom-gear market...

By Jeffry Bartash, MarketWatch
Last Update: 6:30 PM ET Nov 30, 2006

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WASHINGTON (MarketWatch) -- The $11.6 billion marriage of Alcatel SA and Lucent Technologies Inc., which was completed on Thursday, may be the last mega-merger among communications-equipment firms for a while.

But that doesn't mean this industry will be bereft of deal-making.

More likely, investors will see second-tier networking vendors snapped up as gear makers -- and the phone companies they sell to -- continue down a path of consolidation.

Among the companies that have been mentioned as both potential acquirers and targets include Tellabs Inc. (TLAB) , Juniper Networks Inc. (JNPR) , Ciena Corp. (CIEN) and Redback Networks Inc. (RBAK)

As with most large mergers, Lucent and Alcatel (ALA) also hope to reap big savings by combining duplicate operations and pooling research. They plan to cut 9,000 employees from their combined work force of 79,000 over the next three years to generate annual savings of $1.85 billion.

Patricia Russo, chief executive of Lucent, will retain that role for the combined company and move to Paris to run it.

Serge Tchuruk, CEO of Alcatel, will become non-executive chairman. Integrating the far-flung operations of the French and American companies will take up to several years, the companies say.

In the wake of that combination, the largest long-established phone-equipment vendor still without a partner is Canada's Nortel Networks Inc. (NT)

Keeping distance:

Suitors have looked over the company repeatedly but kept their distance as Nortel recovers from an accounting scandal a few years ago.

While most analysts expect Canada-based Nortel to eventually get bought out -- intact or piecemeal, the "who and the when" are far from clear, said Norm Bogen, an analyst with In-Stat, a market-research firm in Scottsdale, Ariz.

Perhaps the most likely suitor, analysts say, is Huawei, the largest vendor in China.

"Huawei desperately wants entry into North America," Bogen said.

Yet such a move could trigger resistance from the Canadian government, which historically has been protective of Nortel.

The company has already shed tens of thousands of jobs and the government isn't eager to see more of them leave the country.

But Nortel isn't the only firm that may find itself the target of takeover interest.

The Alcatel-Lucent merger will put further pressure on smaller vendors to look for a partner -- a trend already long underway.

Although demand for the latest networking gear is on the upswing, phone companies have slashed spending on older equipment and are monitoring their spending carefully.

What's more, telecom providers around the world have consolidated at a rapid pace to create a few dozen huge communications carriers.

The pending merger between AT&T Inc. (T) and BellSouth Corp. (BLS) is just the latest in a long procession of deals, including the combination of Sprint Nextel Corp. (S) and Verizon Communications Inc.'s (VZ) acquisition of long-distance provider MCI.

Fewer suppliers:

Those massive carriers prefer to deal with fewer suppliers who can manage most of their needs.

"You need giant vendors to serve these giant companies," said Stephane Teral, a communications analyst at Infonetics Research.

The consolidation wave has made it tough for second-tier equipment makers to raise prices, increasing the likelihood they will link up with a larger suitor with deeper pockets and more marketing muscle.

The industry as a whole is likely to see annual percentage sales growth in the mid-single digits in the short term, analysts say. As a result, companies have to look to acquisitions to boost growth.

To be sure, the Lucent-Alcatel deal could provide an opening for smaller vendors to create deeper relationships with big phone companies.

"They could say: 'Here's what we do better than the big guys,' " said Nick Maynard, senior analyst at The Yankee Group.

But while "there is always room for niche players, getting much bigger is going to be extremely difficult" unless they either agree to be acquired or pursue their own acquisitions, Maynard said.

Jeffry Bartash is a reporter for MarketWatch in Washington.