Seems like these days, everyone wants to be the next
Considering Monday's deal talk, count
in that crowd. A $100 billion deal would have
swapping a huge raft of its stock for Nortel's optical-components unit. The deal is seen as strong strategic move for both companies, though it could raise antitrust issues with regulators and hamper the companies' relationships with customers and suppliers.
But regardless of whether the deal comes off, the talk highlights the winner-take-all nature of building the Internet. The companies involved -- in this case, the makers of the optical components that will link the next-generation telecommunications backbone -- consider no deal too big, too radical or too expensive. That inevitably invites comparisons to Cisco, the networking giant whose astonishing stock performance over the last decade is the Holy Grail among Internet investors. Investors can only wonder what deal comes next, and what price the winner might pay when the (for now) unstinting demand for this equipment cools down a touch.
"It seems Nortel has kind of woken up to the Cisco mantra in the past year and a half," says Mark Edelen, networking analyst for
Thomas Weisel Partners
. "I think they have seen where their core competency lies and I expect they are going ahead aggressively with the end goal to capture much of the networking market." Edelen has no rating on Nortel and a strong buy on Cisco; Thomas Weisel Partners has no banking ties to these companies.
Analysts say Nortel is completing a successful transition from an old-world supplier of phone equipment to the leading provider of new-generation optical backbone gear. Investors have cheered the remake wildly, sending Nortel shares up some 400% over two years, sufficiently inflating the stock that propels this winner-take-all strategy.
Meanwhile, Corning has been even more impressive, jumping almost 800% over two years as investors have backed the former housewares maker's decision to move full-throttle into the fiber-optic equipment business. Corning has spent some $7 billion over the last year to expand its optical efforts, and earlier this summer it lost out to competitor
in a bid to acquire rival
JDS has become the acknowledged leader in the sector, having grown in the last two years from obscurity into a juggernaut whose stock jumped more than twenty-fold in 1999. In 2000, it has led the charge to consolidate, gobbling up
in June and just two weeks later setting the $41 billion deal for SDL that for now ranks as tech's biggest deal, excluding the big phone companies.
But JDS had to make a deal with regulators to get the E-Tek deal done, and many observers warned that the SDL deal would cause ripples in Washington. From now on, any deal among the big optical players stands to run the same risk of being tied up in red tape.
Another issue investors may be considering is what happens when demand for this sort of equipment slows. In recent years, the biggest problem in the industry has been the capacity bottleneck that has kept these companies from building as much equipment as their customers would have liked to buy. That situation largely continues, even though JDS has made its numerous acquisitions specifically to remedy that problem. But added capacity could mean pricing pressure somewhere down the road, which could pressure returns.
The question of price inevitably arises when numbers as large as $100 billion get thrown around. Admittedly, a Corning-Nortel deal would most likely depend heavily on stock, as both companies have healthy stock prices that make their shares useful as acquisition currencies. But Corning
shares slid 8% Monday morning as investors considered the prospect that Corning would make a huge bet on optical networking that ultimately won't pay off well enough to offset their substantial dilution, should a deal take place.