Some perhaps recognized the omen last fall when Nortel announced it was putting its Metro Ethernet Networks (MEN) division up for sale. Yet the company's decision last month to file for bankruptcy protection still must have shocked anyone who remembers the height of the optical boom.
We can expect that, regardless of Nortel's ultimate fate, the fiber-optic communications community won't be the same. What will that fate be? Pronouncements from Nortel indicate that management holds out hope that the company will survive in some smaller, more focused formâ��perhaps with the enterprise segment at its center. While many find this thought overly optimistic, even that relatively modest goal will require the consummation of the MEN sale, at the very least. However, much like several former baseball all-stars discovered in this past winter's pinched free agent marketplace, finding a new home for MEN at what Nortel (or the courts) would consider fair value will take a long timeâ��and may not happen at all. The current economic environment will undoubtedly preclude the kind of bidding war that would be necessary to drive up the price from bargain-basement levels. Not even Scott Boras is that good.
From the fiber-optics perspective, the fact that a systems house, and not a component/subsystems vendor, was the first giant to succumb to the downturn is perhaps the most unexpected aspect of Nortel's situation. The bankruptcy filing illustrates that a big name and a history of success guarantee nothing in today's climate regardless of where you fit in the optical technology food chainâ��which may make “Who's next?” a popular question with a wide variety of potential answers. I can imagine the usual suspectsâ��the same ones that have been thrown around for the past couple of years as potential acquisition targetsâ��coming up first. However, we shouldn't ignore the possibility that perfectly healthy companies may decide that now is a good time to leave the space for other markets.
On the flip side, it's certainly intriguing to speculate which companies might step up as potential suitors. Early prognostications in Nortel's case have included current competitors such as Ciena, Nokia Siemens Networks, and Ericsson, as well as Juniper Networks, which would be able to complement its router portfolio with some of the networking equipment offered by its largest adversary, Cisco. Huawei also cannot be discounted, although one wonders if it will be hampered by the general Western reluctance to sell to a Chinese buyer.
Within the components/subsystems realm, we've already seen GigOptix and Enablence (which, truth be told, started in components but now must be considered a vertically integrated systems house) roll up companies as they expanded their product lines. Meanwhile, such larger players as JDSU and Finisar have already shown a willingness to expand via M&A, while Opnext must decide whether StrataLight has fully satisfied its appetite.
Nortel may be the first company on the auction block this year. But discerning shoppers will undoubtedly find other bargains as the year progresses.
Stephen M. Hardy
Editorial Director & Associate Publisher