Report: M&A activity in telecom industry will focus on software, virtualization

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A report says that telecommunications vendors are looking to buy smaller software and virtualization companies instead of making blockbuster deals. (Pixabay)

Don't expect any large, blockbuster deals this year among vendors in the telecommunications industry, according to an analyst report.

Carriers and enterprises are in the midst of shifting their networking efforts toward automation, virtualization and intelligence, which has rippled through to vendors' mergers and acquisition strategies, according to Bloomberg Intelligence's 2018 Midyear Outlook: Global Data Networking.

"Larger vendors, such as Cisco, Juniper and Ciena have built broad portfolios organically and via acquisition," Bloomberg contributing analysts John Butler and Boyoung Kim wrote in the report.  "With several companies having much of the core technology in next-generation networks, we don't expect transformative deals, but ones that are smaller in scope to fill functional voids."

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Butler and Kim said there was a growing emphasis among network vendors on buying companies with reoccurring sales models, "but such efforts will likely be complementary, with a bigger focus on targets offering software and virtualization."

The report said that Cisco is finding ways to build reoccurring sales models through its application-centric infrastructure (ACI) platform, and its intent-based networking initiative.

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Some past examples of vendors buying their way into the virtualization space include Nokia's purchase of Nuage Networks, via its deal to buy Alcatel-Lucent, in 2015 and VMware when Dell acquired parent company EMC the same year.

With roughly 50 vendors in play, the SD-WAN sector seems especially ripe for the picking. Last year VMware bought VeloCloud for an undisclosed sum while Cisco paid $610 million for Viptela.

Bloomberg Senior Analyst Woo Jin Ho wrote in the report that the network was growing in importance in order to support data consumption growth, playing a key role in enabling hyperscale clouds, 5G wireless and Internet of Things (IoT). Global enterprise and telecom-equipment spending is expected to grow 5% to $121 billion in 2018 and 3% to $124 billion in 2019, according to the report.

Service providers and enterprises will be looking to buy high capacity equipment in order to keep pace with the increasing bandwidth demands and the new services and applications.

"Software will increasingly play a complementary role in both telecom and enterprise networks to help lower the cost of gear and operations and drive automation," Woo Jin Ho wrote in the report.

Software-defined networking (SDN) and network-automation technologies have started to move out of labs and hyperscale cloud usage to more mainstream enterprise infrastructures. The increasing need for automation is driving SDN adoption, and the technology will play a key role in enabling multicloud access, 5G and IoT networks, according to the report.