Analyst: Nortel eyeing Force10

Nortel Networks might be considering an acquisition of Ethernet switch vendor Force10 Networks, according to Susquehanna Financial Group analyst Joe Chiasson.

Chiasson based his assertion on conversations with industry contacts, adding the caveat that his confidence in an imminent deal “is not fully 100%.”

Nortel, like most companies, does not comment on merger speculation.

Acquiring Force10 would help fuel Nortel’s growing pursuit of enterprise markets and increase direct competition with Cisco Systems. Force10 has found particular success in the market for high-end, 10-Gb/s Ethernet switches, whose popularity among enteprises is expected to increase along with bandwidth demands. Although only 5% of the current Ethernet switch market, Dell’Oro expects the 10 GigE space to grow more than 40% annually to more than $3 billion in 2009. Privately held Force10 collected about $70 million in revenue last year, according to Dell’Oro.

“Given Nortel’s renewed emphasis on enterprise networking and ambition to be a solid second vendor to Cisco in the market, acquiring a leading-edge product to address the high end of the enterprise market makes sense,” Chiasson wrote. “In addition, the fact that Force10 also sells into carrier and Internet service provider markets fits with Nortel’s presence in those markets as well.”

Among Force10’s more notable customers are Level 3 Communications, Cox, KDDI, Google and Yahoo. Among its more notable directors is former Nortel director and chief executive officer Bill Owens.

Nortel’s existing Ethernet switches, the Passport 8600 and 8300, have sold well but “are due for replacement,” Chiasson wrote, noting that much of the company’s enterprise gear came from acquisitions made more than a half-decade ago.

However, Nortel will face an uphill battle competing against Cisco in the enterprise space, Chiasson wrote. “While vendors have certainly challenged Cisco in individual segments of the enterprise market, no vendor has mounted a serious, sustained challenge across multiple product segments…If we were Nortel, we would be very concerned about Cisco’s growing presence in enterprise [voice-over-IP], to the extent that it is a major catalyst for enterprise spending.”