Mergers loom for telecom equipment makers

Deborah Cohen

CHICAGO: A flurry of consolidation by telecommunications carriers could spur mergers by big equipment vendors, including Cisco Systems Inc. and Lucent Technologies Inc., analysts said.

News that Qwest Communications International Inc. is in talks to acquire rival long-distance provider MCI Inc. for more than $6 billion -- the latest in a series of big deals -- is fueling the speculation, as gearmakers face a pared-down base of carrier customers.

Prudential Securities analyst Inder Singh expects that carriers' revenue growth will significantly outpace capital spending in the coming years. He forecasts mid-single-digit percentage increases for 2005, with the biggest portion going toward wireless networks.

"The large incumbent equipment vendors need consolidation to unlock stronger earnings growth," Singh wrote in a report.

Three years of downsizing, cost cuts and restructuring, followed by moderate sales growth in recent quarters, strengthens the case that big equipment makers like Cisco, Motorola Inc., Siemens AG, Ericsson and Alcatel "have the financial capacity to act as acquirers in this market," he said.

The head of Siemens' U.S. operations said the consolidation, with its need to cut costs and look at new ideas, will only open the door for his company to win business as carriers look at new technologies like next-generation, high-speed phone systems and Internet voice calling.

"We think the future is really in the wireless technologies," said George Nolen, chief executive of Siemens Corp.

However, he acknowledged the German company has some product gaps it might look to fill.

"We have a hole in the United States in the access area, or fiber to the home," Nolen said. "As it is going to be such a big market, you would clearly have to look at it."

In recent years, large companies like Motorola, a maker of cell phones and a range of communications network gear, have focused primarily on smaller deals to give them a leg up in growing areas such as security software.

But the recent spate of carrier deals could prompt larger-scale activity, analysts said. In December, wireless company Sprint Corp. unveiled plans for a $35 billion acquisition of Nextel Communications Inc. Earlier this week, long-distance provider SBC Communications Inc. agreed to take over rival AT&T Corp. for $16 billion.

JMP Securities analyst Samuel Wilson believes the bigger merger combinations on the equipment side will likely come from companies whose businesses still glean large profits from carriers, especially traditional long-distance providers whose growth has been in steady decline.

Lucent, Nortel Networks Corp. and Alcatel are on his list, but he also expects heightened activity from smaller companies such as Redback Networks Inc. and Ciena Corp.

Wilson expects equipment companies with business skewed toward big corporations, including Internet traffic gearmaker Cisco and its smaller rival Juniper Networks Inc., may continue to purchase start-ups.

"I think every company right now is reviewing who they should be looking at buying or who potentially may be looking at buying them," Wilson said.

(Additional reporting by Ben Klayman in Chicago)