Interesting article on NT and LU microelectronic and optical component spinoffs:
Nortel Networks' optical-components business reaches crossroad
ebnews.com
Nortel Networks Corp. has a problem.
What should the telecom-equipment maker do now that talks on the sale
of its optical-components unit to Corning Inc. have broken down?
Facing stiff competition from rival telecom-equipment OEMs, the
combination of Nortel's optical-components business with Corning's
seemed like a sure-fire solution to Nortel's components-supply
constraints. It also seemed like a natural step, considering the long
partnership between them.
With the breakdown of those discussions, however, Nortel now must
choose between injecting funds into the optical-components business
to meet surging demand or spinning off the unit in a last-ditch move.
Both moves have significant implications for the optical-components
market.
A spinoff means the Nortel unit will be able to raise enough funds to
match the deep pockets of rival suppliers like JDS Uniphase Corp. By
keeping the unit, however, Nortel may be forced to patronize its
current suppliers like Corning and JDS Uniphase even more if it is
unable to furnish expansion capital.
Nortel may be in the same boat as Lucent Technologies Inc., Murray
Hill, N.J., which plans to spin off its microelectronics unit, a
maker of communication ICs and optical components. Nortel's choices
may be limited by the increasing realization that the era of the
vertically integrated OEM is all but over, analysts said.
"The move toward increasing optical content within any communications
network and outsourcing optical components to merchant manufacturers
is likely to substantially boost the growth rates for pure-play
optical-component vendors," said Arun Veerappan, an analyst at
Robertson Stephens Inc., San Francisco.
In the last year, Nortel jacked up its optical capacity sixfold in an
attempt to eliminate components shortages and satisfy strong demand
for its networking equipment from telecom and datacom companies.
Recently, the company announced plans to spend $1.9 billion to
strengthen its optical operations, with $1.2 billion going to the
optical-components business.
"The investment highlights the value of Nortel's optical-components
business above and beyond its support of Nortel's optical-systems
revenue," said Paul Silverstein, an analyst at Robertson Stephens.
According to Nortel estimates, revenue at the optical unit will grow
250% this year, to $2.5 billion, with more than 80% of the output
going to the parent company.
As it ponders its next move, Nortel is showing no sign of easing up
on its acquisition strategy. The company late last week agreed to pay
about $7.2 billion for Web switch develop Alteon WebSystems Inc., San
Jose.
The all-stock deal would allow Nortel to build next-generation
Internet data centers -- massive compounds of powerful communications
gear such as servers, routers and storage -- that are used to host
Web sites or applications that run Internet commerce, trading and
businesses, according to the Reuters news service.
Nortel said the deal positions it to integrate Internet data centers
with high-speed optical and third-generation wireless networks,
Reuters reported.
Meanwhile, Nortel is increasingly having to source components from
pure-play optical-components suppliers like New York-based Corning,
JDS Uniphase, and Lucent's soon-to-be-independent microelectronics
group. In the quarter ended March 31, JDS Uniphase said Nortel and
Lucent accounted for 38% of its $394.6 million in revenue.
Nortel is competing for components with major telecom-equipment OEMs
and smaller players like Corvis, ONI, and Sycamore, which have been
attracted to the market's double-digit growth rate.
Had it been successful, the Nortel-Corning alliance would have
created an optical-components behemoth with sales dwarfing those of
JDS Uniphase and Lucent's optical-components business combined. The
combined entity would be able to fund much-needed technological
innovations, acquire start-ups with relevant intellectual property,
and construct larger manufacturing plants.
The same high valuation that Wall Street has given companies like JDS
Uniphase, Nepean, Ontario, stood in the way of the transaction.
Nortel and Corning were unable to reach an agreement on the terms of
the deal and which entity would retain control.
The $100 billion figure for the Nortel unit bandied about by analysts
was unacceptable to Corning because it would give the Canadian
company majority control of the entity. Corning executives said the
company was not prepared to yield on this point.
So which option will Nortel pursue now that this proposed alliance
has unraveled? The company appears unwilling to spin off its
optical-components business despite the promise of new equity funds
that could alleviate the capacity crunch facing the business.
There's at least one reason for this position. Nortel's
optical-networking-equipment business is the company's
fastest-growing. Anchoring its growth is the optical-components
business. Though capacity-constrained, the unit has been growing at
double the rate of the entire company.
"We have one of the largest and fastest- growing optical-components
businesses in the industry," said John Roth, president and chief
executive of Nortel. "We intend to continue to invest in and
strengthen this business to provide the strategic support for our
optical Internet business, which grew in excess of 150% in the second
quarter of 2000, compared with the same period last year."
Nortel is sitting on a pile of cash that can be used to finance
expansion in its core equipment business, analysts said.
"Should Nortel seek to monetize this business through either a
spinoff or outright sale, it potentially could realize $100 billion
or more [in excess of $30 per share], a valuation that's not
currently reflected in Nortel's share price," Robertson Stephens'
Silverstein said.
With the enormous valuation its optical-components business can
command on Wall Street, Nortel may be compelled to spin off the unit
in an initial public offering.
Under such a scenario, which would be slightly different from
Lucent's approach, Nortel would retain some control over the
optical-components business to guarantee access to its products,
analysts said.
In the wake of Lucent's planned spinoff, Nortel isn't the only one
exploring options for its optical-components business. Alcatel's
board has approved plans to create a new class of Alcatel stock
intended to track the performance of the company's Optronics
Division, which makes optical components.
Executives at the French company said they believe creating a
tracking stock will enhance market recognition of the Optronics
Division's value and increase Alcatel's ability to respond to
opportunities in the optical industry. |
