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FEBRUARY 17, 2005
By Roger O. Crockett and Steve Rosenbush Telecom Suppliers, Pick a Partner [Page 2 of 2]
SNARLS AND SNAGS. With both its strengths and weaknesses, Lucent has several strategic options. The first would be to sell itself to a larger and more stable outfit, with perhaps the clearest choice being Ericsson. Lucent is No. 1 in CDMA wireless infrastructure, but that sector has a limited future. It would make sense to take that business, which is strong at the moment, and future-proof it by combining with Ericsson, No. 1 in GSM wireless infrastructure. While the potential partners also would complement one another geographically, there are twin potential hurdles. First, any deal faces the complication of Ericsson's two-tier equity structure, which raises all sorts of problems in regard to control of a combined entity. The other issue: Lucent's management may not want to be remembered for having sold an American icon to a foreign-owned company. Other possible Lucent buyers include France's Alcatel, but the national and management issues would still apply, as would recent history: Alcatel and Lucent came close to combining a few years back with the same group of people calling the shots, but the iodea couldn't be made to work. LINK OR SHRINK. Cisco and Juniper are unlikely to bail out Lucent or Nortel, which would depress their margins and share prices. They're more apt to build on partnerships with these companies that strengthen their access to big customers like SBC. And as time goes on, they might buy smaller high-tech companies that will help them supply equipment for distributing video over high-speed phone networks. However it unfolds, consolidation in the telecom-equipment sector is long overdue. In time, "some will have to drop out," says Alcatel Chief Operating Officer Philippe Germond. Industry observers expected such a shakeout during the tech bust. But survivors like Lucent did such a thorough job of cutting costs that they emerged from the downturn with solid balance sheets and plenty of cash. Now they must find new sources of growth. And if growth can't be generated from within, finding partners will be essential.
 Crockett is deputy bureau chief of BusinessWeek's bureau in Chicago. Rosenbush is a senior writer for BusinessWeek Online, based in New York with Andy Reinhardt in Paris
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