FEATURE VENDOR MARKET
Feeling the pinch
Mergers and acquisitions in mature markets are largely defensive plays. The networks
sector is going through an inevitable period of consolidation but it may not be enough
to save all the players.
By Sean Jackson
�s the cellular industry marches triumphantly
over the 50 per cent global
penetration mark, there are ever fewer
habitable places on earth where people cannot
‘get a signal’ of some kind. In mature
markets, where coverage was once a key differentiator,
these days 3G access networks
are not a bonus, they are a given. Emerging
markets—where fixed line infrastructure is
sometimes severely limited and broadband
penetration hovers around the teens—are
following suit.
The cost of infrastructure equipment is coming
down, thanks to scale, technological improvements
and the impressive overseas reach of
vendors from the east with lower overheads.
Such developments are great for network
operators but are a sign of difficult times
ahead for the established infrastructure
providers, which are fighting over fewer and
fewer customers worldwide. It’s crunch time
in vendor land.
The signs were obvious enough 18 months
ago as Canada’s Nortel announced restructuring
that saw 1,100 jobs go. At the time, the
firm’s president and CEO, Mike Zafirovski, said:
“I am confident in the progress we are making
in turning around Nortel and recreating a great
company.” Nortel also said it would review its
pension plan to reduce costs by about $100m
annually starting in 2008.
The first major vendor news of 2007 saw
recently formed Franco US mega-vendor Alcatel
Lucent acquire Nortel Network’s UMTS
radio access business for $320m. Shedding
assets is never a positive sign that a company
is building for the future.
Things were about to get much worse
for Nortel. In March the company restated
financial results for 2004, 2005 and the first
nine months of 2006, and made adjustments
to periods prior to 2004. The announcement
did not look good for a company that was
being scrutinised by the US Securities and
Exchange Commission (SEC) at the time, regarding
a long running financial scandal. “We
will conclude the restatement and complete
our regulatory filings within the timely filer
period,” said CFO Peter Currie.
The SEC was unimpressed, it sued four
former Nortel Networks executives, accusing
them of manipulating earnings to meet internal
targets and Wall Street expectations. Peter
Currie stepped down at the end of April. And in
October, Nortel agreed to pay a civil penalty of
$35m in settlement of all issues with the SEC.
Currie may have been the first, but he was
not the last to go this year. Sweden’s Ericsson
sent shockwaves through the market in
October when it cut its third quarter forecasts.
“The unexpected development in the quarter
is mainly due to a shortfall in sales in mobile
network upgrades and expansions which
resulted in an unfavourable business mix
that also negatively affected group margins,”
said CEO, Carl-Henric Svanberg. Less than
ten days later the firm announced that CFO
Karl-Henrik Sundstrom was to step down.
Quite how that will improve sales is anyone’s
guess, but at least forward looking financial
statements might be more realistic.
Things were no better over at Alcatel Lucent.
In February it announced that it would
cut 12,500 jobs over three years—after deliver-
40 Mobile Communications International | First for news, best for business
ing a loss in the fourth quarter of 2006—and
a significant reduction in full year profits.
In the first quarter of reported results as a
combined company, Alcatel Lucent posted a
loss of �618m compared to a profit of �381m in
the fourth quarter of 2005. Quarterly revenues
dropped from �5.2bn in 2005 to �4.4bn in the
final quarter of 2006. While, full year profits at
the firm dropped to �522m from �1.67bn, while
revenues remained almost flat at �18.25bn in
2005 compared to �18.57bn a year ago.
“While the results for the fourth quarter are
clearly disappointing, the positive long-term
benefits of the merger and the growth potential
of Alcatel Lucent remain as envisioned,”
bluffed CEO Patricia Russo at the time.
In April the firm revealed that first quarter
revenues fell eight per cent year on year to
�3.9bn. The company made an operating loss
of �260m.
Alcatel Lucent said the loss was driven by
lower revenues, as well as investments in WCD-
MA (it bought Nortel’s UMTS business) and in
its converged core portfolio. “We anticipated
that some of the factors which affected our
business in the fourth quarter would continue
in the early months of the year leading to some
revenue decline,” suggested Russo.
In October, the company downwardly revised
its full year forecast, saying that it now
expected revenue growth for 2007 to be flat
to slightly up. The company had previously
estimated that its revenue would grow in
the mid single digits at a constant rate. The
company said the forecast revision was down
to a change in capital spending with wireless
customers in North America.
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