Nortel Strikes First With Verizon Deal

Lucent's (LU Quote - Cramer on LU - Stock Picks) 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 - Cramer on VZ - Stock Picks) tapped Nortel (NT Quote - Cramer on NT - Stock Picks) 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.

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