Nortel Optical Sweepstakes

By Ronald Gruia (News - Alert)

With the sale of Nortel's CDMA/LTE assets to Ericsson (News - Alert) and the initial "stalking horse" bid made by Avaya on Nortel's Enterprise business (the outcome of which will be known on September 11, before this magazine reaches readers), attention is shifting to other lines of business that are still available.

Among those is the optical unit, which generated roughly $1.1 billion in 2008 and, while it had declined to the third spot behind Alcatel-Lucent and Huawei (News - Alert), still held a steady 8 percent market share at the global level.

Nortel once was the 800-pound gorilla in the optical transport market, but the company struggled with increased competition and some execution issues, such as the manufacturing transition to Flextronics (News - Alert), which impacted the lead times, stretching them out to 16 weeks, as they encountered difficulties in manufacturing. Over time, those issues were resolved and Nortel remains a force to be reckoned with in the long haul WDM market.

In addition, the company possesses a leading 40 Gig technology, which can be an important trump card for a potential acquirer. According to RBC Capital Markets estimates, the Metro Ethernet 40G optical business is estimated to be worth approximately $1.7 billion in 2009. Nortel actively invested in this area, while other incumbent vendors opted to OEM 40G technology from a privately held vendor. Nortel had been keen on developing its 40G product line using a single wavelength approach, which is different than the 4x10G strategy being favored by vendors such as Infinera (News - Alert).

The list of vendors that could be eyeing Nortel's optical business is long – Ciena, Cisco, Ericsson, Fujitsu, Huawei, Infinera, Juniper, NSN, Tellabs, among others. Given that Ericsson won the CDMA/LTE (News - Alert) asset sale, we believe it is less likely to participate in the optical auction. Infinera might not have the necessary financial strength to make a solid bid, and Huawei would face a lot of scrutiny both in the U.S. and Canada due to national security concerns of having traffic running over equipment acquired by the company. Cisco (News - Alert), Fujitsu and Tellabs are long shot contenders but, they should not be readily dismissed. Cisco has a large cash balance and some industry pundits could interpret John Chambers' (News - Alert) statement to explore "market adjacencies" as a signal of intent to bid on Nortel's enterprise and perhaps even optical businesses. Fujitsu has a good North American presence, and could bolster its current 7 percent optical share with a potential purchase of Nortel's optical unit to put more pressure on Alcatel-Lucent and Huawei. With Tellabs (News - Alert), there is less of an overlap with Nortel's product lines and Tellabs' ROADMs would complement the Nortel portfolio. There would also be synergies in areas such as wireless backhaul, FTTH and IPTV (News - Alert). That leaves Ciena, Juniper and NSN as the most probable bidders. In the highly competitive optical market, Ciena is a small player compared to rivals like ALU, Nortel, Huawei and Fujitsu (News - Alert). But, unlike Infinera, Ciena has a better cash position, albeit also more debt. Making an expensive acquisition would lead to taking on more debt, a risky proposition in the current macro environment. But, the possibility to gain more scale, market share and manage new accounts might make this a possibility worth considering.

NSN would be able to absorb Nortel's optical business with fewer difficulties, and the acquisition would be a bit of a "consolation prize" for the company, after losing the CDMA/LTE assets to Ericsson. More importantly, the purchase would enable NSN to augment its footprint here in North America, which traditionally has been the Achilles' heel for the company from a global revenue split perspective.

Juniper is another good candidate, given the close ties it has with Nortel. George Riedel (News - Alert), the current CSO for Nortel, was previously responsible for strategy and corporate development at Juniper. Moreover, Lauren Flaherty, the current CMO at Juniper, previously held this function at Nortel. However, in the recent past, Juniper has acquired the reputation of not being particularly aggressive in bulking up.

Transport equipment utilizing wave division multiplexing (WDM) keeps on driving the optical market, as operators add capacity to their metro and long-haul networks. From the top ten players in the market, only Huawei and Alcatel-Lucent (News - Alert) have managed to gain or hold share, while most of the other competitors have experienced consistent share declines. As Nortel unwinds its operations, the implication for these other vendors is clear: try to get bigger to fight the top two players (Huawei and Alcatel-Lucent). In order to be successful, the integration of optical assets needs to realize synergies and as such, would entail changing service providers to one optical system or the other. It is likely that due to these reasons, Nortel's optical business sale will be slightly tougher than the other lines of business, in which a smoother integration could be achieved.



Ronald Gruia (News - Alert) is Program Leader and Principal Analyst at Frost & Sullivan covering Emerging Communications Solutions. Reach him at [email protected].

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