How Nortel's bankruptcy could change vendor landscape

Though Nortel Networks is vowing to return from bankruptcy as a stronger, healthier version of its current self, it’s more likely the company will be broken apart and/or acquired by other equipment vendors, which could significantly re-order the landscape of today’s telecom suppliers, according to Dana Cooperson and Matt Walker, analysts at Ovum, a consultancy.

Because Nortel reorganized itself in recent months into three units seemingly tailored for separation – enterprise, carrier networks and metro Ethernet networks (or MEN, which includes optical gear), it’s unclear at this point which assets might remain with Nortel after it restructures. How it is divided – if it is divided -- may depend in part on gaps in the product portfolios of vendors bidding for assets.

“For example, Ericsson and [Nokia Siemens Networks] both have gaps in their wireline portfolios and little position in enterprise,” the Ovum analysts said in a research note today. “Acquiring significant chunks of Nortel may be attractive to both, and their relatively high cash reserves could make it possible: As of September 2008, both vendors had just under $10 billion in cash and short-term investments.”

Meanwhile, Nortel’s 4G wireless technology, based on Long-Term Evolution (LTE), may be useful to Alcatel-Lucent, NEC or ZTE. Verizon Wireless and T-Mobile Germany have both trialed the gear, and KDDI has purchased it, with expectations for commercial deployment this year.

In particular, the distribution of Nortel’s business to new owners – in chunks or as a whole – could mean fiercer competition for Cisco Systems, whose $20-billion global data networking revenue in last year’s first half was second only to Nokia Siemens Networks.

“For a company targeting Cisco, bits and pieces of Nortel’s enterprise and MEN units are clearly attractive,” Ovum analysts wrote. “Juniper [Networks], Tellabs and Ciena would benefit from looking carefully at Nortel. All have some experience with growth through M&A and have geographic and cultural similarities. They also have some product overlap, but buying a competitor just to get them out of the market is not an unheard of strategy. More important, Nortel has channel depth outside of North America, which is of high value to these companies.”

Nortel’s MEN division, which took in more than $1 billion in revenue in the first nine of months of last year (most of it coming from optical gear), will be a particular prize for would-be buyers. The company’s 40G/100G optical gear, for which Nortel has announced more than 40 customers since unveiling it last April, “is an attractive focal point for a slimmed down Nortel or a competitor looking to limit its own R&D and jumpstart its customer list.” Ovum said. “Virtually all its competitors should be interested in this asset.”