From last weeks Telephony:
Nortel’s at it again
Sonoma acquisition may prove OEM agreements aren’t enough
LIANE H. LABARBA
The practice of acquiring or merging with companies is becoming second nature for Nortel Networks, which last week bought equipment vendor Sonoma Systems. But perhaps foreshadowing Nortel’s purchase of Sonoma is the OEM agreement that already exists between the two companies.
The acquisition is the 12th in 12 months for Nortel. Characteristic of most of Nortel’s other acquisitions, the $540 million price—a pale comparison to last month’s acquisition of Alteon Web Systems for $7.8 billion—is contingent upon Sonoma meeting set business objectives. About $480 million in Nortel stock will be paid to the company at the expected closing in the fourth quarter of this year, while an additional $60 million carrot will be dangled for the achievement of goals.
Nortel’s attraction to Sonoma lies in the company’s integrated access devices (IADs), which move managed services to the edge of the network.
"The local Internet is currently a bottleneck, and [Sonoma] opens up the capacity of it and improves performance," said Steve Schilling, president of access networks for Nortel.
Sonoma also matches Nortel’s local Internet strategy of targeting the global market for carrier services, Schilling said. And considering The Yankee Group’s speculation that the market for delivering carrier-managed services will grow from $10 billion this year to $18 billion globally by 2002, Nortel’s interest in the company was piqued, Schilling said.
Sonoma’s IADs deliver integrated video, data and voice using one device that resides at the customer premises. "Today, most business services are delivered using separate facilities, devices and a variety of [quality-of-service levels]," said Gregory Koss, president and CEO of Sonoma. The Sonoma product lets carriers provide multiple services through just one box, Koss said. "That’s where we see
the future of managed carrier networks going."
Under a May OEM agreement, Nortel has been integrating Sonoma’s IAD into its Universal Edge 600 product family. The two companies also are working to integrate Sonoma’s management system into Nortel’s network management system. In addition, the two are interworking the Sonoma product with Nortel’s Passport core and edge multiservice switches.
The integration of the various product families may have prompted Nortel to acquire Sonoma. While an OEM agreement may work in some scenarios, when a higher level of product integration is required or when customers are looking for
a more end-to-end network solution, acquisition of a particular technology may be the only answer.
"Our vision is to more tightly integrate [the products]," Schilling said.
Indeed, having an OEM agreement isn’t always good enough, said Andrew Cray, research analyst at The Aberdeen Group. "Vendors may reach the point when they need to own rather than OEM."
The Sonoma deal is not the first to spring from an OEM agreement. Nortel originally had an OEM agreement with Promatory, which later blossomed into an acquisition to fill Nortel’s DSL access multiplexer void.
While OEM agreements eventually may turn into acquisition targets for larger vendors looking to complete their portfolios, vendors sometimes enter into OEM agreements out of necessity. In May, Nortel and Sonoa revealed they already
had won a customer together, Madison River Communications.
"It’s a balancing act where service providers will always want more than one vendor to work with. Nortel will always have to OEM," Cray said.
Being bought by Nortel likely will jeopardize Sonoma’s OEM relationships with vendors such as Alcatel and Siemens. "We will continue to support those [agreements], but it is up to our partners in the long term," Koss said. Sonoma already filed its S-1 earlier this year, but Koss said that Nortel’s purchase price met the financial expectations for the IPO.
In addition to the Sonoma acquisition, Cray sees potential for Nortel to possibly acquire a company with a voice gateway or a convergent switch. Nortel has an OEM agreement with Jetstream Communications, which may make it a prime
target. |
