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Telecom Consolidation in a Post-Snowden World

Stocks in this article: ALU NOK SI ERIC JNPR CSCO HP IBM

NEW YORK (TheStreet) -- There has been a flurry of mergers in the telecommunications sector in recent years, but U.S. vendors such as Cisco (CSCO) could be threatened in a post-Edward Snowden world as nations look closer to home for vendors and avoid American companies because of the National Security Agency spying scandal.

First, some background.

Activist shareholders and private equity funds focusing on balance sheet re-capitalization, OPEX optimization and portfolio/customer synergies has spurred higher multiples and brought new attention to the telecom segment. That has, in part, spurred mergers and acquisitions.

Factors such as greater scale (fundamental in achieving more efficient cost structures), TAM expansion (and a faster time-to-market by the acquirer) and distressed asset opportunities have also contributed to this consolidation trend.

The pick-up in telecom M&A can also be seen in such things as industry concentration. Not surprisingly, the Herfindahl-Hirschman Index (HHI), a commonly accepted measure of market concentration, rose from 1,600 to nearly 2,300 over the past decade, which also coincided with a series of mergers (Alcatel-Lucent (ALU), the joint venture of Nokia (NOK) and Siemens (SI)) and distressed asset sales (Ericsson's (ERIC) purchase of Marconi and Nortel's wireless business).

However, the emergence of the Asian Tigers Huawei and ZTE has subdued the increase in market concentration, making it a bit less noticeable.

Nonetheless, industry consolidation is always a topic that frequently comes up in events such as the Mobile World Congress. This year, attendees engaged in lively discussions such as what Nokia might do after the sale of its devices business to Microsoft (MSFT).

Post-divestiture, Nokia would become sufficiently well-financed (having nearly 8 billion net euros cash) to potentially entertain the notion of expanding its current partnership with Juniper Networks (JNPR) into a merger or purchasing Alcatel-Lucent's wireless assets. The discussions typically involved product synergies (SDN, RAN for Juniper/Nokia and small cells for ALU/Nokia) in addition to increased footprint in North America (which will come for both scenarios -- in the ALU case, for instance, North America represented 73% of its overall wireless revenue in 2013).

In order to consider some of these mega-deals, a host of other factors must be considered.

One important exogenous variable is the impact of the fallout from Edward Snowden and the resulting U.S. National Security Agency scandal, which is still not very clear. Information keeps on dripping, making the analysis ever more complex.

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