Recession polarizing fate of telecom gear makers

By Ritsuko Ando and Tarmo Virki - Analysis

NEW YORK/HELSINKI (Reuters) - Nortel Networks Corp's bankruptcy filing shows a global recession pushing weaker telecommunications gear makers toward bankruptcy and consolidation, leaving the industry in the hands of a stronger few.

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 fell 4.6 percent to $15.85, while Juniper Networks Inc fell 3.6 percent to $16.29. Smaller players like Ciena Corp and Brocade Communications Systems Inc also fell.

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.