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Will Alcatel Lucent/Nokia deal break the convergence log-jam?


via Flickr © Sam Beebe, Ecotrust (CC BY 2.0)

For years now across the communication equipment sector there have been expectations that a cracking of the ice and the freeing-up of a key industry blocker will result in the break-up of the long-established log-jam that will be followed by a flood of convergence.

Well, it won't be long now before Spring warmth at last raises the temperature on the tundras of the Northern hemisphere. Indeed we have already seen an early sign of things to come with Nokia's bid to buy Alcatel Lucent. If successful (and it will be) it seems more than likely that a veritable deluge of mergers will follow as the pent-up and pressured dam finally bursts.

When Nokia buys Alcatel Lucent, the combined Finnish-headquartered company will be be big and strong enough to be able to compete head-to-head Ericsson and Huaewi and in a good  position to sell wireless infrastructure to the likes of AT&T, Verizon and their ilk. At the same time Nokia will be enabled to move into wireline products, a significant gap in its current portfolio.

The mooted US$16 billion take-over will give Juniper pause for thought and could even rattle the phlegmatic Ericsson. After all, what company would be safe? Huawei, certainly. Try interfering via a takeover bid there and you'll soon see 'the violence inherent in the system ' as Marx and Monty Python had it. As for the  for the rest? Uncertainty and the destabilisation it engenders will be the order of the day.

The classic response to a merger as big as Nokia with Alcatel Lucent would be for their competitors to seek out an acquisition or merger target or targets as they struggle to broaden their product portfolios and technological competencies and thus be able to provide all the equipment that a telco or network operator might need. After several years of the global partnerships and collaborations that the industry, and the oft repeated mea culpa's from the old guard of, "We know we can't do everything alone so we must collaborate to stay in business" the upcoming tsunami of M&A could actually signal a return to the bad old days of  "One-stop shopping" and the concomitant vendor lock-in that NFV and SDN is supposed to be making a thing of the past. Equipment manufacturers and vendors may feel that they have no choice but to go on an acquisitions spree but their customers certainly  want to go back to the bad old days of the status quo ante. Sparks could fly.

Mike Genovese, senior analyst at MKM Partners in Stamford, Conneticut in the US says, “We’re entering a period in the industry where a lot of deals could happen. Nokia and Alcatel getting together will put pressure on Ericsson to get into wireline and optical, too. It tends to be a copycat industry.” Miaow indeed.

So who are some of the likely targets and buyers? Well, Juniper looks ripe for acquisition but, depending on circumstances and the rub of the green it is big enough also to be an acquirer. The company is worth under $10 billion and must be in Ericsson's sights as it seeks to mitigate the effects of a Nokia takeover of Alcatel Lucent . When that goes through Ericsson will be relegated to second place the provision of wireless and the purchase of Juniper would give an a way in to the rapidly-changing IP router market.

Another target for Ericsson might be Ciena which is worth a comparatively modest $2.3 billion. Ciena has some excellent optical-transport systems but is already in partnership with Infinera, another optical-equipment maker with a value of $2.65 billion. Given the complexity of the webs of partnerships, collaborations and strategic alliances that now dominate the comms equipment environment, new mergers and acquisitions will very quickly become problematical and, potentially, more expensive.

Of course, an alternative scenario is that either Juniper of even Cisco might try to buy Ciena/Infinera.

Another factor to take into consideration is that the big telcos in the US, Europe and elsewhere usually buy both wireless and wireline equipment yearly, but at six monthly intervals. So, wireline infrastructure gets most attention and the lion's share of investment for half the year and then the focus switches to wireless - or vice-versa.

As Mike Genovese says, “It’s lumpy. If you’re only on the wireless side or the wireline side, your business goes away for two quarters. So it makes sense to be end-to-end to be able to offset that and address the entire capex budget of the carriers.”

Whatever happens, investors in some equipment companies are already feeling the benefit of speculation. Juniper shares are up by 1.7 percent, Infinera's stock has risen by 3.1 per cent and Ciena's by 7.7 per cent. Meanshile Ericsson has about $9 billion available in ready cash to help fund purchases. And of course, and very significantly, both Nokia and Alcatel Lucent are spending a lot of time effort and resources on preparing for 5G. It's going to be a major play for the new company and it'll have a head start on most of its rivals. Like they say, an ill-wind that blows nobody any good.

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