TDM and VOIP

The New York Times
2006/03/27
Ian Austen

When the technology boom of the 1990s ran its course, the major companies producing telecommunications gear paid the price. But for all the pain of layoffs and retrenchments, they went through remarkably few consolidations and mergers.

Now, just as the companies have again begun to show signs of life, an Alcatel-Lucent merger might vastly alter the industry's dynamics by creating a large new competitor with worldwide reach, the first that would be a leading company on more than one continent.

The deal, if it is concluded, may bring pressure for mergers or takeovers at competitors including Nokia, Siemens Communications of Germany, Ericsson and, above all, the current North American leader, Nortel Networks, which is based in Brampton, Ontario.

"It's going to be tough for them," said Tyler Adam Chamberlin, an assistant professor of management at the University of Ottawa who has looked closely at Nortel.

"This is a company that's already struggling just to get its own internal operations in order. To have an Alcatel-Lucent merger on top of that is quite daunting."

The good news for equipment makers is that their main customers, the telecommunications carriers, are finally buying network equipment again. But the pressure that all the equipment companies face reflects a fundamental change in the technologies the carriers are seeking.
The new spending, partly a product of the carriers' relative financial stability, stems from their desire to find new profit sources in services such as internet-based television, wireless television and internet voice calling.

To that end, many carriers are finally showing interest in a concept long promoted by equipment makers with relatively little success to date. Put simply, it eliminates distinct networks for different services like landline calls and wireless calls. The new systems run all content from voice to video through a single, closed version of the internet. Sophisticated software gives higher priority to delay-sensitive services, like television, while internet access systems sort everything out at the customers' end.

The complexity of such systems makes a case for companies with a breadth of offerings, like a combined Lucent and Alcatel.

"The basic lesson is that scale does have its advantages," said Mark Sue, a New York-based analyst with RBC Capital Markets. "Similar to a lot of other industries, you have to go big or you have to go home."

Few expect any competitors of a combined Lucent and Alcatel to pack up in the near future.
Krish Prabhu, chief executive of Tellabs and former chief operating officer at Alcatel, said it would take four to five years for the merged firn to sort out its technology and take advantage of its increased size.

"The biggest troubles will be in products that have started deployment in the last five years," he said.

One obvious way to bulk up any telecommunications company would be a deal involving Siemens Communications or Nortel, with the ultimate merger, arguably, being one between them.

Given Siemens' strength in Europe and Nortel's significant position in North America, "there's a compelling logic for joining Siemens and Nortel", said Scott Clavenna, the Boston-based chief analyst with telecommunications equipment research firm Heavy Reading.

Certainly both companies are in a state of transition and in Nortel's case, turmoil. Chief among Nortel's problems is a seemingly chronic inability to sort out its finances.

After restating several years of results because of an accounting scandal, Nortel announced this month that it would make its third restatement in three years because of accounting errors. Still looming over the company from the earlier accounting issues are criminal and securities investigations in the United States and Canada.

Last October, Nortel named a former Motorola executive, Mike Zafirovski, as its third chief executive since 2004. Since then, Mr Zafirovski has replaced most of Nortel's top management, largely with executives from General Electric, his employer before Motorola.

Siemens recently shuffled the top management of its communications division, begun a reorganisation of the operation and is believed to be interested in ultimately selling the division.

Not everyone, however, is convinced that a Nortel-Siemens deal is likely or even desirable.

A telecommunications analyst with CIBC World Markets, Steve Kamman, said Nortel could compete effectively without merging.