Optical networking, the wave of the future-
Thursday, December 16, 1999
Merger Mania
Nortel's move seen as
expensive but
unavoidable
Qtera holds the key
By JILL VARDY
The Financial Post
OTTAWA - Nortel
Networks Corp.'s purchase of
Qtera Corp. for $3.25-billion
(US) in stock is a defensive
move to prevent Nortel from
losing its number-one spot in
the booming market for optical networks,
analysts say.
And while some say Nortel is paying too
much for Qtera, a company that has never
reported sales, most agree it's crucial that
Nortel beef up its war chest of optical
technology if it wants to continue beating such
giants as Cisco Systems Inc. and Lucent
Technologies Inc.
"Going out and buying technology isn't a
crime. Cisco has made an art of it. But paying
$3.25-billion for a company with no sales is a
valuation that a lot of people have a tough time
wrapping their heads around," said Robert
MacLellan, technology analyst at CT Securities
Inc. "By any rational definition of market
valuations Nortel overpaid. But I don't think
it's going to matter. It's a defensive move that
can't be avoided."
Media reports said Cisco in fact did make a
bid for Qtera, but lost out to Nortel's higher
offer. Qtera, according to the reports, preferred
Nortel because it is considered the top-maker
of fibre-optic network equipment in North
America.
Qtera, a private company that has been very
secretive about its technology, is thought to
hold the key to make optical networks work
more cheaply across longer distances.
A signal is sent over an optical network in a
beam of light. But every couple of hundred
miles, the light signal must be converted back
to electricity, cleaned up and re-amplified to
make it to the next junction in the network -- a
process known as OEO
(optical-electrical-optical) processing. "That
slows the network down. and every time you
touch a packet of data you run the risk of
introducing errors," said Mr. MacLellan.
"Ideally, you'd have transit from source to
destination without ever having to convert the
light signal to electricity. That's still a few
years down the road."
Qtera's technology has been proven in trials
by Qwest Communications International Inc. to
send an optical signal across the U.S. with
little or no regeneration.
That's half the battle. The other more difficult
half is developing routers and switches that
will easily redirect optical signals without
having to convert them back into electricity.
Nortel is working on such technology, as is
every other large telecommunications vendor.
For example, Sycamore Networks Inc.
already has an optical switching platform and
real revenue -- it recently signed a
$400-million (US) deal with Worldcom Inc. to
supply optical routers. Lucent is working on
similar technology, as is Ciena Corp.
Cisco has taken equity stakes in half a dozen
optical startups such as Corvis Corp.,
considered an arch-rival to Qtera. "I fully
expect Cisco will acquire Corvis or Ciena by
the end of next year," Mr. MacLellan said. "I
wouldn't be surprised if Lucent is knocking on
Corvis' door as well."
In the cutthroat market for telecommunications
equipment, all the major networking firms are
frantically trying to keep up with new
innovations. Signs that any firm may be losing
share prompts a stampeded from its stock.
For example, Cisco shares fell more than 7%
in early trading yesterday after the company's
quarterly filing with the Securities and
Exchange Commission warned that its profit
margins may erode in future quarters. Cisco
has made the same warning in regulatory
filings that date back to October, 1996, a
common practice to avoid lawsuits if quarterly
sales do fall in future. In fact, Cisco's sales
have grown rapidly for seven straight quarters.
While all the carriers are evaluating optical
networking technology, it's still early for
large-scale commercial network rollouts. But
they know they're going to need to be ready
when customers are convinced optical
networking is the wave of the future.
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