Nokia Siemens is the first to show its hand in defining the fate of Nortel, bidding $650 million for the Canadian firm’s CDMA and LTE infrastructure businesses. This points to an almost-certain break-up of the company, as a plan by former executives to raise private and government funding to take Nortel out of bankruptcy protection appears to have run out of time. The NSN deal sets a low bar in terms of the prices Nortel is commanding for its units, but higher offers could possibly emerge.
Under US bankruptcy law, this is a ‘stalking horse’ deal, and would be superseded by any better bid. The process is managed entirely by the courts and Nortel is not permitted to show any favor to the ‘stalking horse’ bidder, which means there will be very little indication of how the resulting company might operate.
If the acquisition goes through, NSN will gain one no-brainer ‘ a strong base of LTE patents and developments to add to its portfolio, for a low price tag ‘ and one high risk purchase, the CDMA unit. This is the opposite of the LTE business ‘ lots of customers, but in a market under huge revenue and margin pressure, where differentiation will increasingly be on price in emerging markets, rather than services or cutting edge technology. NSN would overnight go from having no CDMA business at all to being number two ‘ but in an unfamiliar market, where GSM majors like Ericsson have painful memories of how tough it is to enter the space, even in times of growth.
And in recent times, NSN will be keenly aware that the squeeze on the CDMA sector has been one of the main factors behind the struggles of market leader Alcatel-Lucent ‘ one of the reasons why ALU’s merger has been such a painful affair, while NSN’s has delivered the benefits of streamlining and scale far more quickly.
Meanwhile, if NSN is after greater volumes, Nortel’s number two market position may not last long, with the two Chinese majors progressing rapidly in CDMA, especially in the emerging markets where its main growth lies. In the first quarter of 2009, the swing to the Chinese suppliers was even more marked in CDMA2000 than W-CDMA, according to figures from dell’Oro Group. The total CDMA2000 market declined by 20% to $1.5bn. Alcatel-Lucent remained in first place, but with its revenues in this technology down by 31%, while second placed Nortel slumped even more sharply, by 48%. Huawei’s CDMA2000 sales were up a massive 430%, putting it in third place, followed by Motorola (down 36%) and ZTE (up 397%).
Not a promising outlook for NSN’s entry into CDMA ‘ however, the firm sees just one target for the strategy, to tap into the trend for CDMA carriers, faced with a lack of a 4G path of their own, to adopt 4G at an earlier stage than their W-CDMA counterparts.
In particular, NSN will be hoping for a share of the business of those CDMA majors which have announced they will roll out LTE trials and first commercial networks in the 2010-2012 period, such as KDDI in Japan, a Bell/Telus alliance in Canada and possible China Telecom. Of course, Verizon Wireless has blazed the trail, though it has publicly said it will stick with its existing choice of vendors ‘ Ericsson and Alcatel-Lucent ‘ as long as they deliver on their promises. But of course, cellcos often introduce additional suppliers as they scale up, and Huawei and NSN will both be waiting in the wings, watching for any slip-ups by the incumbents. Nortel was understood to have performed well in the Verizon trials ‘ it has a strongly regarded LTE platform and R&D program, though its commercial success has, naturally, been killed by the company’s parlous financial state.
The Verizon Wireless award to Ericsson proved that the CDMA-to-LTE market would not be entirely owned by the CDMA suppliers, but NSN remained in a weak position ‘ not the market leader like Ericsson, but no CDMA experience or carrier relationships either (though it did get IMS business from Verizon). So the $650m price tag to gain these advantages overnight, plus an LTE technology program that may well be more advanced than NSN’s own, is a cheap one.
NSN’s CEO Simon Beresford-Wylie said Nortel’s CDMA business was declining but still profitable. ‘We will get depth with those customers that we hadn’t had before, and we’ll use that as a springboard [to LTE],’ he said, as well as gaining north American market share of 30.4%, up from 5.5% – better standing in the US has been one of Beresford-Wylie’s key targets. He admitted NSN has not shone so far in the LTE RAN contracts, though it has won core network business, but it is very early days. ‘I would not judge the overall outcome on the basis of the few contracts that have so far been announced,’ he told an analyst call. ‘We see every opportunity to be part of the second wave.’