Nokia Plan Nukes Nortel

Merger mania in the telecom networking industry has Nortel (NT) feeling left out.

Nokia (NOK) and Siemens (SI) became the latest gearmakers Monday to join the merger wave. They set out a big plan to combine their network gearmaking businesses, putting Nortel in a tight spot.

The networking merger race is now in its late stages. By now, Nokia has found a partner in Siemens, and Ericsson (ERICY) has acquired Marconi's equipment business. Even humble Lucent (LU) has a buyout in hand from Alcatel (ALA).

The shakeout leaves networking specialist Nortel, as well as tech titan Motorola (MOT), scrambling for potential partnerships of their own. But Wall Street is far more concerned about Nortel, and that is why its shares were down 10% at midday Monday.

The pressure to merge or abandon the market stems from the recent wave of consolidation among phone companies. The shrunken field of customers is now ordering less equipment than they would have separately. That has undercut supplier revenue, forcing vendors to slash costs and broaden product offerings through mergers.

"Given Motorola and Nortel now appear to lack telecom infrastructure scale vs. key competitors, we expect both vendors to look at strategic alternatives for these businesses," UBS analyst Nikos Theodosopolous wrote in a research note Monday.

And from the phone-company standpoint, there is a growing need for new gear that merges conventional phone systems with the Internet and wireless traffic on one network. These large-scale upgrades require a broad array of equipment and technical knowledge that's probably best handled by one team, says Yankee Group analyst Mark Bieberich.

"Service providers want fewer vendors to manage bigger projects," says Bieberich.

Over the next few years, Bieberich predicts that the field of 10 to 15 equipment suppliers will shrink by half through mergers.