Nortel Networks Corp.'s (NT) surprise announcement that it plans to seek a buyer for its Metro Ethernet Networks business is a decisive, but risky, move that analysts say could presage an unraveling of the whole company. While some applaud the move as the sort of bold action that struggling Nortel has long required, they say it will be an extremely bitter pill for the company to swallow. As one of the company's stronger businesses, a sale of MEN could leave Nortel's remaining assets in jeopardy, says Lehman Bros. analyst Jeff Kvall.
Other analysts quoted by Business Week are viewing the planned sale as a harbinger of more sales. At least for now, however, Nortel is insisting that's not its intent. In this interview, Philippe Morin, who heads the MEN business, which makes technology to deliver broadband Internet access in urban environments, said the company had identified MEN for a sale precisely because of its relatively strong performance.
"It will help the balance sheet for Nortel but, at the same time, also help us to make some further investments around enterprise, around applications, and other areas around the core strategy direction that Nortel is focusing on," Morin says.
Nortel (NYSE: NT) and Motorola (NYSE: MOT) are in negotiations about putting together their wireless telecom equipment businesses. According toThe Wall Street Journal,"If consummated, the talks will create a joint venture that likely will have sales of about $10 billion."
Nortel has total revenue of just over $11 billion, so half of its assets would go into the JV. But, Nortel has $3.8 billion in long-term debt and had operating losses in two of its last four quarters. The unit that houses Motorola's network equipment operation had revenue of $2.7 billion last quarter, but its operating income fell to $192 million down from $223 million in the quarter a year ago.
Research in Motion Ltd. (NASDAQ: RIMM) -- volatility up prior to unconfirmed Microsoft Corp. (NASDAQ: MSFT) buyout chatter. RIMM is recently trading up $1.33 cents to $83.11 on unconfirmed speculation MSFT is considering the purchase of RIMM on rumor of Google Inc. (NASDAQ: GOOG) introducing GPhone. RIMM has a market cap of $45 billion. MSFT has a market cap of $267 billion. RIMM is expected to report EPS on October 4. RIMM September option implied volatility of 47 is above its 26-week average of 42 according to Track Data, suggesting larger risk.
Tellabs Inc. (NASDAQ: TLAB) -- volatility elevated into renewed report of Nortel Networks (NYSE: NT) interest in TLAB assets . TLAB, a designer and marketer of equipment to providers of telecommunications services, is recently up $0.45 to $10.70. Light Reading reported NT has emerged as the most recent suitor for TLAB. Nortel, Motorola Inc. (NYSE: MOT) and Nokia Corp. (NYSE: NOK) have been frequently mentioned as possible buyers of TLAB over the last five years. TLAB over all option implied volatility of 42 is above its 26-week average of 37 according to Track Data, indicating larger price risk.
Daily M&A update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Interestingly, 3Com has Citadel Investment Group involved as an activist investor. Citadel, which is Kenneth Griffin's investment vehicle, owns 8.4% of the company as stated by this 13D filing. And one must wonder whether these buyout offers are attributable to this 13D letter from Citadel, which makes it clear that the firm believes that 3Com is deeply undervalued. It's also interesting that Robert Chapman, an activist known for his vicious attacks on management, owns the stock in his fund but doesn't have an activist role.
3Com seems like an interesting acquisition candidate because it looks cheap on a sales basis when compared to its industry. Although the company has trouble actually earning money on its sales, this might interest private equity firms because many believe they can run the company "better" if its privately owned and not publicly traded. 3Com doesn't have any debt after backing out the cash on the balance sheet, and as a result potential acquirers could perform a leveraged buyout and not risk overloading the company's balance sheet with debt.
Before getting to that, it's worth pointing out that the notion of borrowing money to buy a high tech company is not that great. The reason is that high tech companies can quickly fall behind and lose market share if they don't come up with new products. And private equity does not usually like to invest in R&D. But if private equity buys a company with long-standing customer relationships, such concerns may be offset by the substantial cost reductions available.
Having said that, here's a list of potential candidates:
Nortel Networks Corp. (NYSE: NT). This network equipment supplier lost $103 million on $2.5 billion in sales in the first quarter of 2007. It also lost out on its bid to acquire Avaya Inc. (NYSE: AV). With a market capitalization of $11.4 billion, a 30% premium would make this $14.8 billion deal the biggest network equipment LBO.
Alcatel-Lucent (NYSE: ALU). This network equipment supplier lost $590 million on $12.3 billion in sales in 2006. With a market capitalization of $30.9 billion, a 30% premium would make this the biggest deal of the lot at $40.1 billion. Given the integration challenges between a U.S. and French firm and the enormous legacy costs, an LBO of this firm might be quite profitable.
Juniper Networks Inc. (NASDAQ: JNPR). This network equipment supplier lost $1 billion on $2.3 billion in sales in 2006. With a market capitalization of $13.9 billion, a 30% premium would make this an $18 billion deal. Unlike NT, however, I think JNPR will resist the LBO route because it has not been around long enough to accumulate the kind of legacy problems NT has in spades.
What do you think of this list? What other candidates come to mind?
Avaya's stock has been trading in the $13 range. Word is that a buy-out might bring $17.
Avaya has a long legacy in the telecom industry. It has been at one time or another part of the original AT&T and Lucent, which merged with Alcatel last year.
Whether Nortel ends up owning Avaya or not, it is probably a better strategic fit than almost any other acquirer. While Avaya sells the telecom equipment that large companies use, Nortel sell the equipment that large telecom companies use. The odds that there is overlap in R&D and management costs is fairly high. There is also a duplication of public company costs.
With Avaya's stock already above $17, either a buy-out will be announced in the next few days, or there will be some very disappointed shareholders.
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Nortel Networks Corp.'s (NT) surprise announcement that it plans to seek a buyer for its Metro Ethernet Networks business is a decisive, but risky, move that analysts say could presage an unraveling of the whole company. While some applaud the move as the sort of bold action that struggling Nortel has long required, they say it will be an extremely bitter pill for the company to swallow. As one of the company's stronger businesses, a sale of MEN could leave Nortel's remaining assets in jeopardy, says Lehman Bros. analyst Jeff Kvall.
Research in Motion Ltd.
According to the 
