MCI WorldCom/Sprint Deal Could Squeeze Network Suppliers
In merger-speak, "synergy" often means that someone is out of luck.
The question is how the merger of
MCI WorldCom
(WCOM)
and
Sprint
(FON)
will impact network suppliers as the two telecommunications companies iron out the details of combining their vast infrastructures. Some Wall Street analysts see the merger as hurting
Ciena
(CIEN) - Get Report
,
Alcatel
(ALA)
and
NEC
(NIPNY)
.
A combination of two telecom operators with parallel networks may result in redundancies and a slowdown in buying new equipment. Take last year's merger of
MCI
and
WorldCom
: As the two mammoth carriers combined overlapping networks, they delayed ordering certain equipment. That proved bad news for equipment suppliers such as Ciena and
DSC Communications
(now part of Alcatel), which missed their earnings estimates.
Sprint and MCI WorldCom "have fiber coming out the wazoo," says Lisa Pierce, an analyst with
Giga Information Group
, in Cambridge, Mass. "They certainly won't be pushing to go out and buy anything from any vendor until they figure out what they are keeping and what they might be selling off."
MCI WorldCom (the company will jettison the MCI portion of its name, reverting back to WorldCom after the Sprint purchase is complete) and Sprint expect to save $1.3 billion annually in capital expenditures starting in 2001 to 2004.
A belt-tightening can be painful for suppliers to the new behemoth. Optical-systems supplier Ciena knows all about order delays: It suffered cutbacks in orders from WorldCom as it prepared to merge with MCI. Ciena might see a temporary slowing of orders since MCI WorldCom/Sprint accounts for an estimated 10% to 20% of its revenue. A Ciena representative deflects worries, saying "We don't think that it's going to have much of an impact on us."
But here's how Ciena might see its business interrupted: In 90 days, Sprint plans to stop building local fiber-optic networks in cities where MCI WorldCom also has fiber. Instead, Sprint will buy capacity on the MCI WorldCom networks as it introduces its much-ballyhooed integrated-on-demand network, or ION, an array of data, Internet and telephone services over the same connection.
ION is expected to be available in the nation's largest 70 cities by the end of 2001. MCI WorldCom already has fiber networks in 50 of those cities.
Sprint's core equipment suppliers Alcatel and NEC also might stand to lose, says Curtis Price, telecom equipment analyst with
Stratecast Partners
, a division of
Frost and Sullivan
. NEC is the sole supplier of the 14 backbone ATM switches for Sprint that coordinate data traffic. An NEC spokesman downplayed his company's exposure, estimating the combined companies count for roughly 2% to 3% of NEC's revenue. An Alcatel official did not immediately return a call for comment.
To be sure, the expected consumer demand for bandwidth tends to keep carriers investing heavily in their networks, regardless of purported merger "synergies." MCI WorldCom likely will boost its capital expenditure $200 million this year from 1998, even though it had predicted cutting this year's expenditure by $2 billion, say analysts James Parmelee and Paul Weinstein with
Credit Suisse First Boston
in a recent report. (Credit Suisse has been involved in banking relationships with MCI WorldCom and Sprint.)
In time, the new company might well narrow its list of suppliers.
"MCI WorldCom's technical philosophy will probably win out, and that's good for the usual cast of characters --
Cisco
(CSCO) - Get Report
,
Lucent
(LU)
and, to a lesser degree,
Nortel
(NT)
," says Price.
