Strong get stronger in telecom gear makers' jungle
NEW YORK/HELSINKI (Reuters) - The collapse of Nortel Networks Corp into bankruptcy is the biggest sign yet that the global recession is forcing wrenching change in the telecoms equipment market, driving the weak to the wall and leaving a few strong winners.
Analysts said that most equipment vendors will suffer as companies and consumers cut spending on wireless and broadband technologies, but bigger companies with ample cash, like Cisco Systems Inc, are likely to keep acquiring assets at deep discounts, leading to a more polarized industry.
"The stronger are getting stronger and the small and weak are getting weaker and going under," said Harry Rady, chief executive and portfolio manager for Rady Asset Management.
"I think that companies like Cisco will continue to pick off companies in the 100 million to a billion-dollar range without having to pay much of a premium," he said.
Canadian telephone equipment maker Nortel filed for bankruptcy earlier on Wednesday, after a sharp slowdown in the United States and other major markets.
As in the case of Nortel, tight liquidity and a sharp drop in orders are seen pushing weaker players, who are struggling with debt obligations and intense pricing pressure, over the brink to a bankruptcy or buyout.
Analysts said Nortel's filing may make investors even more wary about the outlook for companies like Alcatel-Lucent with weak cash flow. While few forecast imminent failure, Alcatel-Lucent has been struggling with slower sales and a rocky transatlantic merger.
Alcatel-Lucent forecast in December a decline of 8 to 12 percent in the market in 2009, a far sharper drop than its rivals have forecast.
Nortel, one of Canada's most prominent companies, had long struggled under a deteriorating balance sheet, slowing demand, and intense rivalry with rivals including Alcatel-Lucent and Ericsson, as well as low-cost Asian vendors like Huawei Technologies.
Shares of most global telecom equipment makers fell on Nortel's announcement amid worries of slower network spending. Cisco stock fell as much as 5.2 percent on Wednesday, while shares of Juniper Networks Inc ended 4.7 percent lower at $16.10. Smaller players like Ciena Corp and Brocade Communications Systems Inc also fell.
Shares of optical component maker and Nortel supplier JDS Uniphase ended down 14 percent at $3.76 on the Nasdaq.
WINNERS AND LOSERS
Despite such broad losses, analysts said the implications for the industry would likely be mixed.
"Markets inevitably react to something like that in a sort of contagion effect on equity values. But I don't necessarily see it as a negative for the rest of the sector," said Fitch Ratings senior director Stuart Reid, although he forecast sales for the overall industry to weaken in 2009.
"Realistically, there could be opportunities for some of the other vendors to acquire some assets at a mark-down price."
Cisco has said it will be aggressive with acquisitions, and Chief Executive John Chambers told reporters on the sidelines of the Consumer Electronics Show in Las Vegas last week that he expects "natural consolidation" over the next year.
However, few expect Cisco or other companies like Ericsson to buy Nortel in its current form, some noting Nortel's unsuccessful attempt last year to sell its metro ethernet and optical business.
Many said rivals will mostly benefit in the form of market-share gains.
"Longer-term it could mean potential share gains for companies such as Cisco, Alcatel-Lucent, Ericsson and Nokia Siemens and others," said RBC Capital analyst Mark Sue.
Analysts also said that equipment vendors with global operations are likely to be more insulated from the downturn. Even with a recent slowdown, Chinese and Indian economies are still growing at high rates with local carriers still investing heavily in infrastructure projects.
"Operators on developed markets are looking for savings, but in emerging markets deals are still going ahead," said eQ Bank analyst Jari Honko.
China Unicom said on Wednesday it expects to spend at least 60 billion yuan ($8.78 billion) in capital expenditure this year to develop its 3G network, while China's Ministry of Industry and Information Technology has said the country will invest 280 billion yuan ($41 billion) in 3G in 2009 and 2010.
Analysts said that in North America and Europe, pressure from shareholders to maintain cash positions means that carriers may think twice about spending on emerging wireless and broadband technologies.
Telecoms service providers and their equipment suppliers are capital-intensive businesses that depend heavily on bond markets to meet their funding needs.
"It could further dampen interest and investment in next-generation technologies like WiMax and LTE," said Ben Wood, research director at CCS Insight.
(Editing by Matthew Lewis)
