The Lightwave Blog

Posted by Meghan Fuller Hanna

Ovum analysts Dana Cooperson and Matt Walker believe that Nortel's bankruptcy filing may result in a more balanced industry structure for communications equipment.

In a comment issued this morning, Cooperson and Walker note that when the latest phase of Nortel's downward spiral took shape four months ago--with the announcement that it would explore divestiture of its Metro Ethernet Networks (MEN) division--they argued that "a more radical approach than divestiture was needed to cure the company's woes."

While the bankruptcy filing is radical, the analysts believe it will also be exploited by the company's competitors, who are "now in a strong position to remind customers that Nortel can no longer give assurances of continued development of any specific products, which will surely impede Nortel's ability to bring in new business."

In fact, say Cooperson and Walker, Nortel's bankruptcy may open the door for broader industry rebalancing. They cite four specific examples, excerpted here:

Taking on Cisco
In data networking, Cisco remains dominant in every region and in most product segments . . . . For a company targeting Cisco, bits and pieces of Nortel's Enterprise and MEN units are clearly attractive. Juniper, Tellabs, and Ciena would benefit from looking carefully at Nortel. All have some experience with growth through M&A;, and have geographic and cultural similarities. They also have some product overlap, but buying a competitor just to get them out of the market is not an unheard of strategy. More important, Nortel has channel depth outside of North America, which is of high value to these companies.

40G/100G jumpstart
The MEN's 40G/100G business, which Nortel now puts at 42 customer wins--defined as purchase orders or contracts that include 40G, not deployments--is an attractive focal point for a slimmed down Nortel or a competitor looking to limit its own R&D; and jumpstart its customer list. Nortel has done a good job promoting its solution's viability over competitors' networks, so virtually all its competitors should be interested in this asset.

Diversification through acquisition
Ericsson's purchase of Marconi and Redback--after their respective bankruptcies-- provides a blueprint for what is likely to be the ultimate outcome for Nortel: acquisition by a firm looking to fill out its equipment product line. For example, Ericsson and Nokia Siemens Networks both have gaps in their wireline portfolios and little position in enterprise. Acquiring significant chunks of Nortel may be attractive to both, and their relatively high cash reserves could make it possible; as of September 2008, both vendors had just under $10 billion in cash and short-term investments.

Evolution to 4G
Nortel's mobile infrastructure business is now focused on LTE/SAE (long term evolution/system architecture evolution). It is working hard to develop a strong LTE/SAE ecosystem, including LG Electronics, LG Nortel, and other partners. It is doing its best to demonstrate its capabilities through trials (e.g., Verizon and T-Mobile Germany) and announcements (e.g., a deal with KDDI) and expects some commercial launches in 2009. Its LTE assets (part of the Carrier division) may be attractive for another player, perhaps Alcatel-Lucent, NEC, or ZTE.

Finally, Cooperson and Walker concede that Nortel's decision to file for bankruptcy now, when it still has $2.6 billion in cash reserve, may enable it to re-emerge as a smaller, more focused version of itself. However, they believe the scenarios they mapped out above, in which "rivals use Nortel's bankruptcy as a chance to reshuffle the supplier landscape dramatically to their benefit, seem more likely."