Posted by Stephen Hardy
One of the more interesting aspects of yesterday's announcement that Bookham and Avanex had agreed to merge was the timing -- what took so long?
Alain Couder and Giovanni Barbarossa were asked during yesterday's conference call about the merger's timing. While Couder answered that there was no reason to wait out the downturn before consumating the deal, Barbarossa piped in with "My question was why we didn't do it yesterday!"
Given that has been pretty much the sentiment among most observers of the space, I got through to Yves LeMaitre (thanks Howard!), currently Bookham's vice president of telecommunication sales and vice president of corporate marketing and future head of the combined company's non-telecom business, and posed the question to him.
According to LeMaitre, the timing had a lot to do with the current macro-economic environment. The time is right for consolidation in the industry, he feels. Also, the companies' current valuations increased the feasibility of a merger. Finally, LeMaitre echoed a story Couder told during the call about a "trial run" interaction between the executives of the two firms that convinced the Bookham president and CEO that the two companies could work compatibility together.
One has to wonder at this point whether the departure of Jo Major as Avanex president and CEO last July was the result of a difference of opinion within the senior management ranks about whether it was time to find a buyer. Given Barbarossa's enthusiasm for the deal, it certainly appears he's happy with what has taken place.
Archive for 'January 2009'
Posted by Stephen Hardy
The long-rumored merger of Avanex and Bookham is a rumor no longer. I'm on hold as I write this, waiting for the conference call to start.
According to someone at Bookham's PR firm, it's believed that Bookham will own a majority stake in the combined company, something like 53.25%. Bookham also will have a 4-3 majority on the board.
More soon...the conference is starting now.
As you may remember, I highlighted back in August the fact that Lightwave magazine was undergoing a redesign. The fruits of our labors have finally been unleashed on the world -- and I'm curious about what the world thinks.
Those of you who subscribe to the magazine should have received an email yesterday from me offering links to both HTML and PDF versions of the January issue. If you know us only from this website, you can check out the 'zine here .
My editorial in the December issue described what we were hoping to accomplish. Basically, we've tried to combine the readability of a printed magazine (you can print out the articles easily if you really like paper) with the multimedia and interactive aspects of websites.
How did we do? You can comment below or go to our corner of the Interconnection World community on our sister site, Connector Specifier.
Ovum analysts Dana Cooperson and Matt Walker believe that Nortel's bankruptcy filing may result in a more balanced industry structure for communications equipment.
In a comment issued this morning, Cooperson and Walker note that when the latest phase of Nortel's downward spiral took shape four months ago--with the announcement that it would explore divestiture of its Metro Ethernet Networks (MEN) division--they argued that "a more radical approach than divestiture was needed to cure the company's woes."
While the bankruptcy filing is radical, the analysts believe it will also be exploited by the company's competitors, who are "now in a strong position to remind customers that Nortel can no longer give assurances of continued development of any specific products, which will surely impede Nortel's ability to bring in new business."
In fact, say Cooperson and Walker, Nortel's bankruptcy may open the door for broader industry rebalancing. They cite four specific examples, excerpted here:
Taking on Cisco
In data networking, Cisco remains dominant in every region and in most product segments . . . . For a company targeting Cisco, bits and pieces of Nortel's Enterprise and MEN units are clearly attractive. Juniper, 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.
The MEN's 40G/100G business, which Nortel now puts at 42 customer wins--defined as purchase orders or contracts that include 40G, not deployments--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. Nortel has done a good job promoting its solution's viability over competitors' networks, so virtually all its competitors should be interested in this asset.
Diversification through acquisition
Ericsson's purchase of Marconi and Redback--after their respective bankruptcies-- provides a blueprint for what is likely to be the ultimate outcome for Nortel: acquisition by a firm looking to fill out its equipment product line. For example, Ericsson and Nokia Siemens Networks both have gaps in their wireline portfolios and little position in enterprise. 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.
Evolution to 4G
Nortel's mobile infrastructure business is now focused on LTE/SAE (long term evolution/system architecture evolution). It is working hard to develop a strong LTE/SAE ecosystem, including LG Electronics, LG Nortel, and other partners. It is doing its best to demonstrate its capabilities through trials (e.g., Verizon and T-Mobile Germany) and announcements (e.g., a deal with KDDI) and expects some commercial launches in 2009. Its LTE assets (part of the Carrier division) may be attractive for another player, perhaps Alcatel-Lucent, NEC, or ZTE.
Finally, Cooperson and Walker concede that Nortel's decision to file for bankruptcy now, when it still has $2.6 billion in cash reserve, may enable it to re-emerge as a smaller, more focused version of itself. However, they believe the scenarios they mapped out above, in which "rivals use Nortel's bankruptcy as a chance to reshuffle the supplier landscape dramatically to their benefit, seem more likely."
Nortel yesterday announced that it was filing for bankruptcy, a move that did not exactly come as a surprise, given the rumors swirling around the industry over the last several months.
In September, Nortel announced that it would explore a divestiture of its Metro Ethernet Networks (MEN) Business , including its optical and Carrier Ethernet portfolios. Its most frequently cited suitors included Huawei, Cisco, and Nokia Siemens Networks, with Alcatel-Lucent and Motorola considered long shots as both struggle with problems of their own.
In December, The Toronto Globe and Mail reported that Nortel had received offers from "three serious bidders" and was considering selling off additional assets in lieu of seeking bankruptcy protection. In the meantime, the company continued to burn cash, the value of its shares continued their free-fall, and the company inched closer to NYSE delisting. In late December, news broke that the company was, in fact, exploring bankruptcy as an option, and several analysts argued that this could be its best course of action. In a research note dated December 19, 2008, UBS analyst Nikos Theodosopoulos offered the following viewpoint:
NT has an interest payment of $100-$120 million due on Jan 15. We believe a likely challenging 4Q08, weakening '09 outlook, and tightening DIP financing may cause NT to withhold its interest payment and possibly pursue an early bankruptcy. If the company cannot sell its MEN division or get additional assistance from the Canadian government, an early bankruptcy may make sense to maximize franchise value.
And now the deed is done, leaving the telecom industry to ponder what may be next for the Canadian telecom giant. Will the company emerge from bankruptcy stronger than ever, or will it be forced to sell assets in what could amount to a fire-sale?
In an article from yesterday's New York Times , "Nortel Seeks Bankruptcy Protection" , Ian Austen cites several analysts who believe that the company is likely headed for liquidation. If they are correct, he writes,
. . . the end of Nortel would be one of largest failures in the telecommunications equipment business . . . . Nortel's demise would also be among the biggest business failures in Canadian history. During the zenith of the technology boom, Nortel's market value accounted for about a third of all equity traded on the Toronto Stock Exchange.
A news article in yesterday's Wall Street Journal quoted telecom analyst Ping Zhao of CreditSights, who "gave Nortel little hope of emerging from bankruptcy. 'They were already out of favor due to their weak finances,' [she said,] 'but for any of the new projects, they are definitely out of the picture' due to the filing."
Today's Toronto Globe and Mail argues that "Nortel needs a plan, fast ." Writers Simon Avery, Jacquie McNish, and Shawn McCarthy note that Nortel has not yet formulated "a master plan on how to re-emerge a stronger company."
An approved agenda will most likely include the sale of assets, but whether that disposition leaves the Nortel brand alive or amounts to a full liquidation of the century-old company remains hotly debated.
"A breakup is not a top priority for the business. On the contrary, it's to be able to come out the other side as a nimbler, more focused, successful technology company," Mike Zafirovski, [Nortel's] president and chief executive officer, said in an interview. "There is no announcement today regarding strategy."
Over at Bloomberg.com , reporter Amy Thomson notes that some of Nortel's customers, including Verizon, are vowing to stick around, but they may already be weighing their options.
Verizon, the largest U.S. phone company and Nortel's biggest customer, "isn't doing . . . anything different about Nortel today than yesterday," spokesman Eric Rabe said. The company accounted for 11 percent of Nortel's $10.9 billion in 2007 sales. Rabe said Verizon probably won’t change its relationship with Nortel in the short term.
Should Nortel be dissolved, Verizon has agreements with other network providers, including Cisco, for the parts it needs, Rabe said. Verizon has already moved some of its business to Cisco to meet demands for new technology, he said.
Finally, Toronto Globe and Mail columnist Derek DeCloet argues in today's edition that Nortel should not rely on a government bailout but instead needs to refine--or perhaps redefine--its corporate vision:
It's too early for government help. Nortel must first undergo a corporate soul-searching exercise: What does the company want to be? Where does it want to compete, and where does it want to give up? Assuming it is not dismantled entirely, the future Nortel will certainly be smaller, and focused on perhaps one or two lines of business.
So what do you think? Does bankruptcy represent Nortel's best path forward?