Doron Inbar

It's a strategy that has proved its value time and again: Divide the troops and attempt to outflank the enemy. The days of overrunning a combatant in horde-like fashion are long gone.

ECI Telecom — the Israel-based provider of networking solutions encompassing broadband access, core transport, optical networking and media gateways — is embracing its divide-and-conquer strategy in the hopes of breaking away from a “jack of all trades, master of none” position in the telecom marketplace.

Last summer, the company decided to split itself into five distinct divisions, each focusing on a specific niche. The split took effect at the beginning of the year and resulted in the following entities:

• Inovia Telecoms specializes in access solutions and DSL products

• Lightscape Networks focuses on optical-networking solutions

• Enavis Networks develops bandwidth management and data communications channel solutions

• InnoWave ECI specializes in fixed-wireless access solutions

• NGTS focuses on next-generation telephony solutions for packet-switched networks.

According to Doron Inbar, ECI Telecom's CEO, the goal of the five-way split is to make each new entity more nimble and responsive than its parent.

“We looked around and saw the rise and success of vertical-solution companies such as Sycamore and Ciena on the optical side and Copper Mountain Networks in the access space,” Inbar says. “We saw that if you focus on a specific vertical solution and you are the product specialist, and you have an edge in technology, then you can bring solutions that the giants cannot.”

R. Robert Goldman, an analyst with U.S. Bancorp, thinks the move to split the company is sound.

“Certainly they needed to do this,” he says. “One of the problems ECI has had as a middle-tier telecom company is that they tried to be everything to everyone. That's difficult to do when you're a company of that size.”

It will probably continue to be difficult, at least for the short term, as the telecom market copes with the economy. Already, ECI has felt some growing pains, laying off 1400 workers since the beginning of the year and cutting senior executives' salaries by 10%. The company's stock price has declined steadily from its 52-week high of $39.19 in July 2000 to $7.26 in early May 2001.

ECI's first quarter 2001 results were disappointing. The company posted a net loss of $256.4 million ($2.77 per diluted share) compared with net income of $23 million (54¢ per diluted share) in first quarter 2000. Revenues were also down sightly for the quarter, as ECI generated $252.5 million, compared with $263 million generated in the year previous.

While carriers' spending with ECI has not yet decreased, Inbar says the cutbacks were necessary based on market conditions. “Consequently, while [carriers] are spending as much with us as they used to, they are telling us that they are looking at certain areas in the market that may not grow as they thought before,” Inbar says.

Inbar suggests the primary reason the company's stock price has been on a slippery slope is that analysts learned of ECI's decision to split the company last July.

Goldman agrees — to a point.

“It's a shame that the timing is what it is and that they couldn't get the ball rolling earlier,” he says. “Not all of their divisions will be funded quickly with huge gobs of money. We don't know when the pickup in telecom spending will turn. When it does, it will probably turn for the Ciscos, Alcatels and Lucents first.”

Inbar counters: “Prior to the crisis, everyone in the investor and capital markets took [our plan] well and saw the logic behind it. So we're very optimistic about 2002. I can't say that we are going to make miracles in 2001, but I think we will make headway next year.”

But Goldman says it will be tough for the divisions to flourish on their own in this environment. “The children are being sent into a world where it's very difficult to compete right now,” he says.

For that reason, Goldman suggests that ECI may sell one or more of the divisions. “But how long it will take before any of this is realized is anyone's guess. It's going to depend more on the macro environment than on ECI itself.”