Shotgun Weddings in Network Market

This column was originally published on RealMoney on June 19 at 11:16 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The mobile network market waited about half a decade for its first major merger, but the second arrived in a snap. Just two months after Lucent(LU Quote) and Alcatel(ALA Quote) hooked up, Nokia(NOK Quote) and Siemens(SI Quote) are creating a joint venture housing their infrastructure units.

All of a sudden, the infrastructure market has acquired a new shape.

There are three megavendors: Ericsson(ERICY Quote), Alcatel-Lucent and Nokia-Siemens.

And there are two weaklings: Motorola(MOT Quote) and Nortel(NT Quote). The possible future merger between these last two is going to be the furthest thing from a love match.

Nightmare After Christmas

The question of why we suddenly had two major mergers this spring and early summer is an interesting one. Since the infrastructure market cratered so spectacularly around 2002-03, there has been a strong suspicion that there are simply too many major vendors. But the vendors waited until spring 2006 to commit to substantial mergers.

There is some reason to suspect that these big mergers are shotgun weddings. Perhaps the biggest telecom surprise of first quarter of 2006 was the series of noteworthy drops in mobile infrastructure operating margins at several key vendors, from Ericsson to Motorola. Was this weak quarter the gun on the infra companies' temples? Did the mergers happen relatively quickly after the first quarter because everyone was terrified of ending up with Nortel as a corpse bride?

Inevitably, there is a suspicion that the network mergers of this summer were triggered by the emergence of a new wave of pricing pressure and/or demand slowdown in Europe and North America. Thus, while the Nokia-Siemens news is now helping the telecom rebound that emerged last week, the merger timing may be seen as an evil omen as investors digest the implications.

Nevertheless, Lucent got a relatively appealing Alcatel with its emerging market dowry, and Nokia got something of a China play in Siemens' network unit. The Germans have been rather hapless in the W-CDMA market, but they have been getting cozy with the Chinese, preparing for a possible TD-SCDMA mandate in the upcoming Chinese 3G auctions. This might be a plus for Nokia.