When I did my review of the Street’s view of consolidation in the service provider space, some of you wondered about the network equipment vendors. After all, it’s hard to imagine how a buyer industry so pressed for profits it has to collapse into itself via consolidation could avoid putting some price pressure on its vendors. If that happens (which clearly it is already) then the vendors come under consolidation pressure as well, as a target or as someone looking to acquire to bulk up or build up. But some more than others.
Who is “safe?” Obviously Huawei doesn’t have anything to worry about. It’s not going to be bought and it’s unlikely it would go out and grab up one of the other network names as long as there are issues in Congress with selling to the big US operators. They could do M&A in the enterprise space or in software, and I think that’s likely. The equipment guys really don’t have much that Huawei needs; they need ammunition in the NMS, OSS/BSS, and orchestration spaces. This is where I think Huawei should focus their own M&A telescopes.
Cisco is similarly immune from being acquired, but they do have a risk. For a long time activist investors have considered jumping into Cisco (as they have with rival Juniper), but this time to force a breakup. Cisco has a bunch of fast-growing but small product areas and a behemoth legacy switch/routing business that has nowhere to go, profit-wise, but down. They could do some more M&A, but the fact is that Cisco is torn right now between “buying revenue” and “buying R&D” (an issue for a lot of vendors). They may wait a bit to see which would do them more good. They really have a good asset set; I think their challenge is just one of priorities.
Another player I think is unlikely to be bought is Ericsson. The company has a good thing going right now, reducing its exposure to commoditizing hardware and focusing more on professional services. The open-source pressure in the network space is likely to help Ericsson, since most operators see themselves either buying integrated packages from open source vendors like Red Hat or Wind River, or integrating with a partner. I think Ericsson may stand back on acquiring something in the near term, though. Their primary assets are in the OSS/BSS space and other than picking up some software players to add technology value in orchestration or other network-related areas, I think they’ll ride the fence.
The “well…maybe” players start (alphabetically) with Alcatel-Lucent. I think Alcatel-Lucent has a strong product portfolio, but they have a pretty high level of expense and they are also a bit too monolithic and glacial to contend with a fast-moving market. I don’t think that they are at imminent risk, but they would be vulnerable to a major shift in technology like SDN or NFV if they couldn’t harness it to their benefit. Their positioning is particularly vapid, and that’s been an ongoing problem for them. It’s simply too early to say whether they can track trends or look exciting. If they’re looking for M&A I’d suggest that management/orchestration might be the place to focus. That would give them more opportunity per invested dollar I think.
Next in the “maybe” group is NSN. They have a good but narrow product portfolio, something that can create some very significant risks. Mobile infrastructure has been a kind of “stay-the-course-fools-paradise” because margins there have circled the drain closer to the rim than the rest of networking. That doesn’t end the downward slurp, though. Not only that, Huawei clearly sees mobile as its own big priority and there’s nobody you want less in a competitive situation than them. NSN’s question is whether it takes a risk by holding to current product boundaries or takes a risk in expanding them. As long as they’re on the fence there, they won’t acquire anything big, I think. If they make a big move, watch to see if it steps outside the mobile box. If it doesn’t then NSN may be looking to be adopted instead of having a single parent.
In the “could-be-acquired-or-worse” category we’ll again go in alphabetical order and start with Brocade. While the company had a significant blip in strategic traction last year because of the Vyatta deal and some semi-good-if-perhaps-accidental NFV positioning, they lost all of it by the fall survey because they just couldn’t seem to follow up with a cohesive story. The problem Brocade has is that they are really a data-center player without much of a cloud or NFV strategy and those are what will drive data center networking. Their spring 2013 success showed that being stridently different will get you attention, so they need to do that again, but also follow up by doing something stridently useful.
Next on the list is obvious; Juniper. The company just announced staff cuts as their new CEO tries to make friends with activist investors. The problem is that, as a US company, you can’t sustain yourself in a commoditizing market by trying to fight Huawei on price and if you cut costs you can’t ramp up R&D or M&A like you need to. The problem Juniper has is its price/sales ratio and P/E. The former is about 2.8 and the latter about 31 as of yesterday; Brocade’s is 2.14 and about 16. That would suggest to most that Juniper’s stock is pricy, discouraging M&A. And if you buy back stock and cut costs, your near-term ratios are probably going to move even higher. The worst problem is that while the company has many strong things it could do, it’s too preoccupied with cost management to do them.
For anyone who’s a potential acquisition target, the big question is who would take the buyer role. I don’t think there would be much value in any of the network vendors buying another network vendor. The computer vendors are the obvious play, and here we have Dell, HP, IBM, Microsoft, and Oracle. But I don’t think any of these companies would move to acquire one of the network players. HP and Dell already have some networking gear. IBM is selling off x86 server business because the margins stink, and networking would truly suck for them. OEM is better. Oracle is I think smart enough to see that they don’t want to be in the commodity hardware business. So…I think all of the possible acquisition targets are likely stuck in 2014, which means they’d better be buffing themselves up for either a rosier life as an independent or a more attractive tidbit for a bigger player to acquire.