Nokia (NYSE:NOK) has set off a new wave of consolidation in the telecom equipment market, reaching a deal to acquire Alcatel-Lucent (NYSE: ALU) for $16.6 billion. That move is now fueling speculation that Ericsson (NASDAQ: ERIC) will make a similar move to round out its portfolio with more wireline capabilities by making a run for either Ciena, Infinera or Juniper.
By acquiring Alcatel-Lucent, Nokia will not only surpass its nearest European rival Ericsson on the wireless end, but also it will have an expanded set of wireline capabilities--particularly optical and IP routing--two things that Ericsson does not have in house today.
Analysts seem to think a deal to purchase Ciena, Infinera or Juniper is necessary for Ericsson to diversify its holdings with a full suite of wireline and wireless capabilities to stay on a competitive level not only against Nokia, but also Huawei.
Mike Genovese, an analyst at MKM Partners, told Bloomberg that the Nokia/Alcatel-Lucent deal will likely force Ericsson's hand to broaden its portfolio to also include wireline.
"We're entering a period in the industry where a lot of deals could happen," Genovese said in a Bloomberg article. "Nokia and Alcatel getting together will put pressure on Ericsson to get into wireline and optical, too. It tends to be a copycat industry."
Ciena would make immediate sense for Ericsson because it would give it an optical product set. On the optical side, Ericsson has been delivering products to key customers like Telstra through a relationship with Ciena via a strategic partnership they began in 2014. Through that relationship Ericsson has been extending Ciena's packet optical portfolio, including the 6500 Packet-Optical Platform and 5400 family, to its customer base.
Already, the partnership has been finding utility with major customers like Telstra to supply not only Ciena's optical equipment but build a foundation to implement software-defined networking (SDN) and network functions virtualization (NFV) functionality in its network.
Having recently been named along with Cisco as one of Verizon's two packet optical vendors for its 100G metro network overbuild, Ciena itself continues to be a formidable optical player that understands the complexities of serving Tier 1 service providers. If Ericsson were to purchase Ciena, it would immediately gain a foothold with one of the largest wireline U.S. telcos on its customer roster.
Two other potential targets for Ericsson are Infinera and Juniper.
Although it did not win a spot on Verizon's metro 100G upgrade build, Infinera is still a formidable player that's been finding utility with a host of traditional Tier 1 service providers and also other players outside of telecom like data center provider Equinix. During the fourth quarter, Infinera added 10 new customers for its DTN-X platform, including three that were new to the company.
Routing is also another element that Ericsson could benefit from a refresh as well. Despite seeing continual competition from Alcatel-Lucent, Juniper continues to enjoy the spot as the No. 2 routing vendor under Cisco. Seeing the growing interest from customers like AT&T to implement software functions in their networks, Juniper has, like Alcatel-Lucent and Cisco, been bolstering its own software portfolio with its Contrail SDN solution for cloud and NFV.
Catharine Trebnick, an analyst with Dougherty & Co., wrote in a research note obtained by Barron's that despite the potential of Infinera or Juniper, Ciena would be the best fit for Ericsson.
"We believe this could finally push Ericsson to look closely at acquiring Ciena and/or Infinera," wrote Trebnick. "We believe Ciena is the more likely candidate as a result of the strategic partnership which was announced February 20th, 2014."
Purchasing companies to bolster its optical portfolio is nothing new for Ericsson, having purchased a large chunk of Marconi for $2.1 billion in 2005. Later in 2006, it purchased Redback Networks, giving it a set of edge and metro IP routing capabilities.
Besides the hardware capabilities, another element that Ericsson could bring to the table for other service providers is software. In recent years, Ericsson has been snapping up a number of software companies, including Microsoft's Mediaroom division and Telcordia. By expanding its portfolio with either new optical and/or routing capabilities, it would have a full set of capabilities that could address the broader software-driven transformation service providers are taking with their optical and IP networks to automate their networks.
Ericsson may be remaining tightlipped about any future plans, but it's clear that the vendor is going to have to consider making a move to bolster its portfolio if it does not want to be overshadowed by a what will be a much more powerful Nokia.--Sean