Merger fever still contagious

Expect more mergers in 2006, especially in the telecom vendor segment, a longtime industry observer is predicting.

Clifford Holliday, principal in B&C Consulting and author/analyst with Information Gatekeepers Inc., includes that prediction among his top 10 for the upcoming year. Holliday annually publishes his predictions but, unlike most prognosticators, accompanies that publication with the previous year's results, graded for accuracy.

By his own assessment, Holliday scored a solid 'B'--85%--on last year's predictions, which included IXC/RBOC mergers, 150% growth in Internet traffic, high-speed access penetration of 45% and increased ROADM activity, but no boom in deployment and widespread voice-over-IP offerings, among other things.

His 2006 predictions include a reiteration of earlier comments that the Bell companies will overtake cable in broadband penetration as early as mid-year, but also forecast some seismic shifts in the equipment vendor landscape.

"We have felt for some time (since the telecom/Internet blowup of 2000) that there are too many major equipment vendors in the U.S.," Holliday writes in his post on www.igigroup.com. "We just think that the market is too small to support Lucent, Nortel, Siemens, Alcatel, Fujitsu, Ericsson and the others. We predict that either one or more of the large, traditional telecom vendors will be involved in a major merger, or will leave the U.S. market."

One reason the timing could be right, he said in a telephone interview, is that the "scary" period for equipment vendors seems to have passed. "A lot of them have come out of the woods, financially speaking, so you might be getting something in a merger, other than a balance sheet problem," Holliday said. "At the same time, because of mergers, the actual number of customers has gotten very small. Only so many vendors can win an RFP--there are definitely too many major vendors still around."

Another great unknown is the impact that Google could have on telecom, if it chooses, he adds. "They could swallow an RBOC and not even burp, given their market capitalization," Holliday stated. "It's very possible they will make a major telecom play this year. Buying an RBOC probably doesn't make sense for Google, but buying pieces of a telecom network might."

Among his other 2006 prognostications, Holliday believes this will be the year of major movement to a next-generation network that combines intelligence with the ultra high capacity of fiber optics to create a more cost-effective, much less labor-intensive network.

E-mail me at CWilson3@prismb2b.com.