Size does Matter !!!

It all started with the much hyped acquisition of Lucent Technologies by Alcatel. It also happened at a time least expected. It spun quite a few heads in the Telecom circles around the world. They were busy working out the economies behind the acquisition but no one could justify the timing, although just about everyone had no doubts about the value (both shareholder & customer) that can be generated out of the acquisition. The Equipment Vendor industry was undergoing the semi boom period when the acquisition happened. Service Providers across the world were investing on network upgradation in order to meet increasing demand for bandwidth. But this didnot necessarily mean good profitability because the vendor industry was fragmented with each company having its own R&D roadmap ahead of it which offset the higher revenues. Alcatel didnot just see the product synergies, it also analyzed the R&D synergies arising out of the acqusition.

To Counter the strategies of the mammoth Alcatel-Lucent, a spree of consolidation swept across the industry. Be it Ericsson - Marconi or Nokia - Siemens (which by the way is a joint venture), the advantages seemed too attractive to neglect. Rather than offering 5 or 6 saperate boxes of the same technology to the market, the vendors would rather offer 3 Quality ones which would inturn save on huge R&D and production costs. The Savings can either be passed on to the consumer or can be routed for further R&D. This would inturn keep the share holders happy.

Fast Forward to end of 2007 and we see gloom and doom spread acrss these merged entities. The Companies are regularly missing their synergy targets and this has left the banks(which lent money for the acquisition) fuming. It is not hunky dory on the customer front as well. NSN has already lost 2 key orders (BSNL 45 Mn order being the most significant) and Alcatel/Lucent is struggling to win any tenders. The Same Telecom Analysts who were gung-ho about the consolidations before are now predicting a doom or these companies. The Surge of chinese vendors in western markets is adding to their concerns.

Now comes the tough part - my analysis of the situation. Well i believe people were expecting too many things too soon out of the merged entities. What the so-called analysts fail to understand is that the merger is not the be-all and end-all. Companies also have to shell out huge sums for restructuring both operations and on the basis of employee skill sets. NSN merger reportedly laid off 10000 people, there have been no official numbers of the layoff by Alcatel Lucent but i expect it to be more than 5000. The biggest challenge will be synergizing the R&D. Both companies will be at different stages of R&D and of different technologies. Evolving on an R&D roadmap which is in line with company strategies will be one of the huge challeges. For Example, prior to acqusition, the biggest chunk of Lucent revenues were Mobile/Cellular Infrastructure and Alcatel was a market leader in SDH/SONET equipments. Now where does Alactel-Lucent concentrate (and channelize its R&D) ?? It will take time for companies to realize their synergies and it will take more time for these to reflect in company bottom lines. And for all those who are complaining against the chinese juggernaut, i believe, a merged entity is better equipped to take them on rather than a stand alone one.

So what does all this come down to ?? Well thankfully, the industry is still in the hands of good, sensible telecom business managers and the wave of consolidation will definitely continue although with much reduced steam than before. And who is next on the blocks ?? There was quite a few companies with good potential.. I believe Tellabs tops the list followed by the struggling Mobile handset division of Motorola. Juniper Networks may soon be on the blocks especially after Huawei's stake-buy in 3 Com.