Phone Companies Cheer Supplier Consolidation
The telecommunications equipment sector is facing another round of consolidation and leading the cheering section are the telephone company customers.
Phones companies see fewer, healthier suppliers rolling out the technologies necessary to offer consumers and corporate customers the next-generation networks to stream videos and surf the Internet on their wireless devices.
"We like to see consolidation, especially when larger companies pick up very innovative products," Balan Nair, chief technology officer for Qwest Communications International Inc., told Reuters last week at the Supercomm industry trade show here.
The bottom line is the phone companies want to buy from a supplier with staying power.
"We want to know that two, three, four years down the road that we're going to have that continuity of business service," Verizon Communications CTO Mark Wegleitner said. "One thing a small company has to be afraid of ending up as is a one-trick pony."
And the carriers are not afraid to let the smaller suppliers know that.
"If we tell a company we are concerned about their stability that sends them shopping," BellSouth Corp. CTO William Smith said.
The small fry are getting the message loud and clear, with many lining up partners to resell their gear, even if that hurts profit margins.
"We do get pressure from some carriers to have a partner because they're worried about small companies," said Kevin Sheehan, chief executive of Hatteras Networks, a privately held company whose gear allows companies to offer Ethernet service over traditional copper wires.
Nevertheless, Sheehan hopes Hatteras, which launched its first product recently and expects to ring up its first sales in the fourth quarter, remains independent.
With telephone companies beginning to loosen their purse strings, large makers of telecommunications gear, which slashed research and development budgets during the telecom slump, are on the prowl for promising technologies to boost growth.
Good-sized deals like Tellabs Inc.'s $1.7 billion announced acquisition in May of Advanced Fibre Communications Inc. may occur, but bigger companies are more likely to swallow smaller rivals with next-generation gear that will entice customers to spend, industry executives said.
"We're moving from who's going to live and die to some consolidation," Fred Lax, CEO of switch maker Tekelec, said last week at Supercomm. "In the past six months or so, there's been a resurgence of a little bit of M&A; fever."
Exhibit A is Lucent Technologies Inc.'s deal in May to buy closely held Telica, a maker of equipment that transmits phone calls over high-speed data lines, for $295 million in stock and options.
The pace of mergers and acquisitions has picked up as 83 deals through late June sported a value of more than $3 billion, compared with 132 deals for all of 2003 valued at $2.83 billion, according to data provider Dealogic. However, that is a far cry from the peak in 2000 when 275 deals were cut worth $109 billion.
The equipment sector, like the rest of telecommunications, is coming out of the three-year slump that saw phone companies slash spending because of excess network capacity. But spending has stabilized and is expected to turn up next year.
"All the mechanics are in place for more deals." Tellabs CEO Krish Prabhu said.
Telephone carriers aren't worried about losing pricing power with suppliers as there will still be plenty of companies to play off one another for the best deals, executives said.
However, being purchased by a publicly held company is not as easy as it sounds given the struggles of the sector.
"M&A; sounds attractive, but there are not a lot of really healthy guys to deal with," said Turin Networks CEO John Webley, who prefers an initial public stock offering for his company later this year or early in 2005.
Turin, in which Motorola Inc.has almost a 10 percent stake, makes machines that haul the voice and data traffic to the switch on a network. With $16 million in sales last year and projected annual growth of as much as 300 percent, it expects profits later this year.
Consolidation also will take place through attrition. "There will be some outright failures," Juniper Networks CEO Scott Kriens said, "where things just go to zero and doors close."
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