Vendors prepare for M&A

The proposed merger of Lucent and Alcatel is sure to kick off a massive wave of consolidation among equipment vendors of all sizes. As many of those vendors have come to rely on reseller partnerships for some of their products, each corporate combination has complex implications for a sector full of moving parts.

Lucent's recent acquisition of carrier Ethernet equipment vendor Riverstone Networks might seem redundant to some once Lucent has access to Alcatel's 7450 and 7750 edge products (the former TiMetra gear). But others say the TiMetra and Riverstone gear complement each other because the latter has had more traction selling smaller, Layer 2 boxes in emerging markets.

Having failed to win Riverstone in auction, Ericsson is presumably still shopping for carrier Ethernet gear. Some analysts predict the Swedish vendor will acquire one of its partners, Extreme Networks or Juniper Networks. Extreme would give Ericsson more Ethernet-centric technology, but Juniper would lend far greater scale. And with about $18 billion in cash, Ericsson can afford to think big. Others think Juniper might merge with the communications unit of its biggest partner, Siemens, which drove 14% of Juniper's sales last year.

However, Juniper has a reputation for stubbornness, analysts say, which might hamper cultural integration or even acquisition at its current stock price. “I don't think [Juniper CEO] Scott Kriens would take $20 a share for Juniper,” said Dave Fore, Soleil Securities/SurTerre Research analyst. “Maybe $30.”

At the same time, Juniper may lose a customer as Lucent melts into Alcatel and stops reselling Juniper routers in favor of the TiMetra gear. (Lucent probably contributes between 5% and 9% of Juniper's revenue.) Whether that would make Juniper humbler and more open to mergers and acquisitions is tough to say.

Redback Networks will be a hot acquisition target for just about anyone looking to buy, analysts say. And because Alcatel is one of its top customers, contributing 12% of its revenue last year, an acquisition of Redback by one of Alcatel's rivals could be complicated. Or the industry's new giant might use its new muscle for a defensive acquisition. “If anyone went for Redback, it might heighten interest in Alcatel in taking out Redback themselves,” Fore said.

One vendor that could lose big in the coming game of M&A musical chairs is Nortel Networks, which recently had to restate its earnings yet again after years of accounting problems. Nortel probably won't be able to find an M&A partner until its books are entirely spotless, analysts say. And by that time, all the best partners might be taken.

One of Nortel's key enticements as a merger partner is its presence in the North American wireline equipment market (especially with big marquee carriers here), which would appeal to Ericsson or to Nortel's former partner, Huawei Technologies.

The full implications of the Lucent/Alcatel merger “will take some time for me to think through,” wrote Ovum-RHK analyst Mark Seery in an e-mail the day the merger was announced. And at press time, rumors were swirling that Ericsson might make a bid for Lucent, which would make most of this analysis obsolete.