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Tue, Feb 22, 2005 - Page 12 News List

Merger trend may spread to telecom suppliers

RIPPLE EFFECT Analysts foresee slower orders from traditional carriers this year in light of recent tie-ups, and this could force consolidation among their suppliers


Call it the trickle-down theory of mergers. A wave of telecommunications industry mergers has created behemoths in the traditional telephone and cellular industries in the last year.

Now the consolidation wave is likely to hit the equipment makers that supply the big carriers.

Investors are increasingly talking about potential deals between Motorola, Lucent Technologies, Nortel Networks and possibly European manufacturers like Alcatel. The rationale is simple: When carriers merge, they cut their capital spending budgets. To survive, their equipment suppliers have to merge to keep revenue growing and expand into new product areas.

"There are still too many suppliers out there," said Ari Bensinger, an industry analyst at Standard & Poor's. "Now that they are fighting over a smaller pie, something has to give."

Edward Snyder, an industry analyst at Charter Equity Research, and others point to the Cingular Wireless-AT&T Wireless merger, which was announced last February, to show how the changing relationship between carriers can affect suppliers.

In the quarter after that deal was announced, Ericsson, the Swedish equipment maker that supplies Cingular and AT&T Wireless, said orders from North America plunged 48 percent compared with the previous quarter.

Equipment makers are likely to see slowing growth in orders this year, industry analysts say, because of deals between SBC Communications and AT&T and between Verizon Communications and MCI.

Though government regulators are expected to take a year to rule on the deals, the telecommunications companies will probably resist raising their capital spending plans until their mergers are approved and they have a better idea of what their combined companies will look like.

Once that happens, they are expected to ratchet back on spending. For instance, SBC, which will have greater bargaining power with suppliers by absorbing AT&T, expects to cut procurement costs by 5 percent after its deal is approved. The newly combined company also expects to reduce capital spending by up to US$200 million in 2007 and as much as US$300 million in both 2008 and 2009.

SBC and AT&T buy about 60 percent of their combined equipment from the same vendors. That is not good news for manufacturers like Lucent, which has been a big supplier to the Bell operating companies and to long-distance carriers like AT&T.

Last month, Lucent said it expected sales to grow 4 percent to 6 percent this fiscal year, which runs through the end of September. That's below the 6.8 percent increase in sales last year.

Lucent and Motorola have been at the center of most of the merger speculation recently.

Motorola relies heavily on its mobile phone handset business, which has become increasingly commoditized as a result of pressure from rivals in South Korea and elsewhere. By acquiring Lucent, Motorola would expand its presence in the wireless equipment market to complement its strong position in the cable equipment market.

A combined Motorola-Lucent would hold 65 percent of the market for cellphones that use CDMA technology, the standard that Verizon Wireless, Sprint and others use. But only 30 percent of the world's cellphones use that technology, and the companies would not gain ground in Europe and Asia, where GSM technology is more prevalent.

Spokesmen for Motorola and Lucent declined to comment on a potential deal between the two companies.

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