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Nortel Metro Ethernet Networks assets: Why no sale?

Nortel's Metro Ethernet Network assets, which include Carrier Ethernet and optical units, have been for sale for a year with no final bids. IDC analyst Eve Griliches looks at why a competing equipment vendor hasn't closed the deal.

When Nortel's Metro Ethernet Networks (MEN) assets went up for sale in September 2008, it surprised Nortel's customers, employees, vendors in the optical networking space and every analyst who covers that market.

Here we are a year later, and no public bids have been made for the metro Ethernet networking unit. Our sources tell us numerous vendors have done "due diligence" (i.e. taken trips to Nortel to evaluate the equipment) several times over the past year.

We have to note the possibility that the Nortel MEN assets will never being purchased at all.
Eve Griliches
Program DirectorIDC

So why no sale? It may be a consequence of high price expectations on Nortel's part. The original price was near the $2 billion mark, although it may have dropped to a more reasonable number in recent months. But we expect Nortel still wants more than $1 billion for the unit. What that means is that any potential suitor has to judge the business case based on purchase price and analyze when the real payback for that investment will be met, as well as when Nortel's optical products will generate enough revenue margin to support the business case.

The optical piece of due diligence also relies on the 40G and 100G market growing enough to support the purchase price. IDC expects the 40G/100G market to unfold slowly or in small volume. In addition, 40G/100G development solutions are well underway from vendors using relatively the same technology and ASIC design. So over the past year, other vendors have had time to catch up on their development, as well as get a really good look at Nortel's secret sauce during the due diligence process.

Other segments of the MEN division, like Carrier Ethernet, are relatively shut down. New products have been cancelled and older products have stopped shipping. The Ethernet functionality is slated to be integrated into the optical products. The Nortel ATM equipment is on its own slow market decline, and both of these segments comprise less than 12% of the MEN revenue anyway.

Potential buyers for Nortel's MEN unit Let's go through the potential suitors and the benefits and issues of each potential acquisition. But first we have to note the possibility that the Nortel MEN assets will never being purchased at all. That's looking more likely than ever, as sad as that may be. But on to the suitors, from the most to the least likely:

  • Ericsson: would gain potential North American wireline customers like Verizon and AT&T, where the older Marconi equipment has not been able to operate because it supports SDH rather than SONET. Ericsson could also benefit from the service and support of all the Nortel MEN equipment that's already installed with their strong services play. While Ericsson has yet to make a bid to date, it is likely to participate in the bidding process. A negative to the purchase is the overlapping optical equipment with Marconi.
  • Fujitsu would be the perfect companion for Nortel's MEN. Both companies are extremely technical, have fostered vertical integration and have a base in Dallas. Fujitsu's metro WDM products are well ingratiated in North American operators, and the Nortel long-haul product would be a terrific one-two punch for them. Unfortunately, Fujitsu's optical base is in North America, and decisions like this must be made in Japan.
  • Cisco would be a likely candidate because of its large enterprise installed base, while Nortel has actually sold lots of optical equipment to the U.S. government, as well as the high-end verticals. The acquisition would also give Cisco increased credibility in optical and place the company squarely in the position to respond to the Verizon RFP for packet optical long haul which came out recently. But John Chambers abhors low-margin businesses, so while we know Cisco has done extensive due diligence, it is unlikely the optical group will get the approval from above.

About the author: Eve Griliches is a program director within IDC's telecommunications equipment group. She provides in-depth insight and analysis on service provider routers and switches, as well as the optical networking market. Griliches also provides critical business intelligence on emerging technology trends and their impact on the overall telecom market space.

This was last published in September 2009

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