The Alcatel Effect
There has been a lot of news in recent months on communications equipment, much of it about consolidation. In October, 2005, corporate networking powerhouse Cisco Systems (CSCO) bought set-top box maker Scientific Atlanta. In November, phone giant SBC closed its acquisition of AT&T (T), and within a matter months announced plans to buy BellSouth (T). Then, on Apr. 2, telecom-equipment giant Alcatel (ALA) bought Lucent (LU).
Even as decades-old brands disappear, a new crop of communications-equipment startups is emerging. Within days, Force 10 Networks, a maker of networking switches used by Google (GOOG) and other Net high-fliers, is expected to file documents announcing its intention to sell shares to the public, sources say. Riverbed Technology, which makes gear to speed data between corporate locations around the world, is also on the verge of filing its so-called S-1, say industry sources. Neither company would comment for this story.
If they pan out, the IPOs would be the first among communications-equipment makers since 2001, analysts say. Others probably won't be far behind. Take Shoretel, which makes new-fangled Net-based phone systems that are catching on with the corporate set due to their sound clarity and extra features. "Shoretel customers talk about their office phones the way people talk about their iPods!" notes JMP Securities analyst Sam Wilson. That enthusiasm could eventually translate to a winning IPO.
Something else that makes these fledglings stand out: They aren't really startups. Many were founded before the telecom crash, but survived -- and now boast impressive customer lists, proven technologies, and solid customer-support operations. "You now have a whole crew of companies that are ready to go, and who have VCs that want to start paying the mortgage," says Wilson.
Shoretel was founded in 1998, while Force 10 and BigBand Networks, another fast-growing supplier of broadband gear, came along in 1999. "We'll see another round of IPOs, but it won't be like the 1999 era," says Hassan Ahmed, CEO of Sonus Networks, a seller of voice over Internet protocol (VoIP) gear to phone carriers. "These are companies that have been working for six or seven years, and have established real footholds."
Some of the small fry could get snapped up before they get a chance to go public, as bigger suppliers look to fill out their product portfolios. On Mar. 22, Lucent paid $207 million in an auction to buy the remaining assets of struggling Riverstone Technologies, a vestige of former networking highflier Cabletron Systems.
Healthier outfits can also expect more phone calls. Last December, Alcatel bought a 25% stake in 2Wire, which makes home networking gear. Indeed, rumors are swirling that public companies such as Redback Networks (RBAK), Foundry Networks (FDRY), and even Juniper Networks (JNPR) could be bought (see BW Online, 3/27/06, "What's Next for Nortel"). Within two years, predicts one top investment banker, "Juniper won't be a public company."
Even if they don't find themselves in the crosshairs of a buyer, some companies are likely to land lucrative distribution deals. Mature suppliers may give up trying to push internally-developed products in favor of more innovative fare. "The rate of discussions has gone way up for us, because all of the big guys have holes they need to fill," says Hammerhead Systems founder Rob Keil. "Everything is moving in the right direction for companies like us, who have customers and revenue."
Not all the dealmaking among big telecom bodes well for smaller players. A buying spree by Verizon (VZ) and SBC (which has since taken the name of its former parent, AT&T) means fewer phone companies to sell to, and probably less spending on gear as these behemoths focus on cutting costs. The "service-provider market will be even more unattractive than it has been in the last few years -- and it was already pretty unattractive," says Rick Tinsley, CEO of two-year-old tech startup Silver Peak Systems.
SIEMENS FOR SALE?
And more consolidation among the big boys may be on the way. For example, BusinessWeek Online has learned that Siemens (SI) is actively shopping what is left of its communications division. It has already sold off a mobile phone business to Taiwan-based BenQ Corporation. One source says Siemens has been working with consultants from Booz-Allen on its strategic alternatives. While the company has hinted it wanted to keep promising pieces of the business, sources say it is now leaning towards selling off all of the $16.1 billion business -- most likely in chunks, since it's unlikely to find a buyer for the whole thing. Siemens says talk of the sale is speculation.
By buying Lucent, Alcatel solidified its position in high-end phone switches, particularly in the U.S. As a result, "Siemens has to decide whether to get bigger or smaller -- and the proponents of getting smaller are winning," says one industry insider who has been approached about buying parts of the unit.
Analysts say Siemens, like Nortel, has struggled to maintain leadership in the most important markets. The Munich-based giant recently saw Deutsche Telecom (DTE) grant a big contract to deliver Net-based TV services to Paris-based Alcatel, for example.
Who might the buyers be? Insiders say big wireless players such as Ericsson (ERICY) or Motorola (MOT) might want the Siemens unit that sells basic phone switches to phone companies. So might Cisco, though the company says it has no plans for another merger along the lines of Scientific Atlanta.
Others, including Avaya (AV), might want the Siemens unit that sells to corporations. If that doesn't pan out, there may be other options. "I've heard of some private equity interest" in some or all of the Siemens units, says Tom Nolle, president of consulting firm CIMI Corp.
However Siemens and the other established players fare, there's no shortage of entrepreneurs stepping up with dreams of becoming the Old Guard of tomorrow.