Nortel Strikes First With Verizon Deal
Scott Moritz
01/07/04 - 02:08 PM EST
Lucent's (LU Quote) past is coming back to haunt it again.
The big telecom-gear maker's failings at developing new switching gear proved costly once more Wednesday, as big customer
Verizon (VZ Quote) tapped
Nortel (NT Quote) for a critical network upgrade.
The nation's largest phone company said Wednesday that it intends to use Nortel's equipment to help convert its network to the voice-over-Internet protocol, or VoIP, standard that the market has lately grown so enamored of. The deal exposes a critical shortcoming in Lucent's failing to have a viable softswitch just when telcos are making big voice-on-the-Net plans.
Not surprisingly, investors took the development as a huge win for Nortel, sending its shares up 10%. What was more interesting was that the setback didn't interrupt Lucent's New Year surge; in midday trading, shares of the New Jersey company were up a solid 6%. And considering how early we are yet in the sky-is-the-limit VoIP game, some investors think it would be a shame to count Lucent out on the basis of one loss.
"Nortel has hit a grand slam in the first inning of a nine-inning game," says Lehman Brothers analyst Steve Levy.
Stepping Up
Though the announcement was merely a letter of intent and not a contract, investors and analysts viewed the move as a huge positive for Nortel. That's mostly because in the network gearmaking business, major projects are usually considered for years and split among key suppliers. In this case, though, Nortel has exclusivity for at least part of the deal, dislodging incumbent Lucent for 18 months.
The arrangement was particularly damaging for Lucent given that it was the original supplier of switches to Verizon. But Lucent's efforts on the so-called softswitch have been
marred by first by failures, then by a confused strategy and later
deep staff cuts.
But as industry observers point out, the shift to VoIP, much like the earlier switch from analog to digital technology, will take a decade at least.
And though Verizon's plans make it seem that Nortel has a pretty good lock on a five-year phase of the project, the exclusive status will last 18 months and be limited to new offices.
"What shocks me," Levy says, "is that more than $2 billion in market value was added to Nortel today. That is a gross overreaction on the positive side."
Stunt Double?
Notably, Verizon doesn't typically disclose contract winners, let alone letters of intent, so to some observers Wednesday's VoIP announcement was a bit of a stunt.
"This is certainly good for Nortel for publicity purposes, but there's nothing there to drive the stock up much," says Sam Greenholtz, an analyst with Telecom Pragmatics.
"I don't think it's crippling for Lucent. They are behind on the softswitch, so this just puts pressure on them to be ready at the end of 18 months," says Greenholtz.
As luck would have it, Lucent sees things just that way. A Lucent spokesman said the company continues to work with Verizon on its VoIP planning, and adds that Lucent will offer a good softswitch solution "as VoIP accelerates."
That in mind, Lucent investors sent the stock up 6% to $3.48, a 52-week high. Lucent shares have jumped 22% in a week as Wall Street bets that the broken gear shop is on the road to recovery.
One mid-Atlantic financial analyst who asked not to be named said Verizon's intended audience was probably the Federal Communications Commission and the investment community. Verizon has taken the lead among the Bells in
lobbying regulators to ease rules that give Net-based competitors cost-savings advantages.
A Verizon representative said the company is giving the VoIP plans big play because there is a lot of attention on that part of the industry right now. Asked why Verizon chose an uncharacteristically public endorsement of one vendor, the rep said "we are celebrating" our plans for the future.
