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September 01, 2006
Alcatel buys Nortel 3G unit
Alcatel is continuing its rollup of North American telecom equipment assets. The French telecom equipment giant, which is in the process of buying U.S. telecom gear leader Lucent Technologies, said Thursday it will acquire the high-speed wireless equipment making assets of Canada's Nortel Networks for $320 million in cash.
The unit makes 3rd-generation technology, which supports the rapid transfer of voice and data, from Internet traffic to video and music. Nortel is selling the unprofitable division so it can focus on even-faster 4th-generation mobile technology, which will rival the speeds of fixed line broadband connections found in homes and businesses, vastly improving the quality and depth of mobile multimedia. It also will continue to make 2nd-generation wireless products, which support voice and slower-speed data applications such as text messaging.
The price of the transaction was lower than Wall Street estimates, according to analysts at Merrill Lynch. They expected a sale in the $400 million range, and other brokerages expected the sale to fetch as much as $500 million, Merrill analysts Arya Vivek and Tal Liani said in a report.
But the deal will focus Nortel operations and boost profitability by eliminating a money-losing unit, the analysts said.
The larger question is whether Nortel can become more successful by concentrating on a few markets where it can be number one or two. "As Nortel redefines their business model I expect more of these kinds of announcements. It seems if they cannot lead and be profitable we can expect to see Nortel get out of any business," telecom analyst Jeff Kagan wrote.
Conglomerates continue to fall out of favor, on the theory that they're too hard to manage, that synergies among businesses are a fiction, and that too many units under a single corporate structure are forced to compete for limited capital.
Nortel, like Lucent, once sought to provide pretty much everything that a telecom carrier could want. There's really only room for one such supplier now, and it's Alcatel.
Now we will get to see whether Nortel's stripped down and focused approach will work in practice as well as it does in theory. The Merrill analysts aren't so sure. "The sale of 3G assets could prove shortsighted," they said. That's because 3G growth prospects are greater for now than those of 4G, which remain speculative. But perhaps that's the point. By focusing now on an emerging market, Nortel has at least a chance to become a dominant player.
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