Nortel News: Promising Start-Ups, Alcatel-Lucent's Troubles

Promising Start-Ups

While the telecom equipment market is far from robust, it is encouraging to see start-ups still attracting financing.

Case in point is ConSentry, a Silicon Valley-based network switch maker, that just raised $21 million of venture capital. The deal was led by Ontario Teachers’ Pension Plan, while Sequoia Capital, Accel Partners, INVESCO Private Capital and DAG Ventures, Translink Capital and NCD Investors also participated.

While I have no idea if Nortel (NT) is interested in buying ConSentry or a network switch maker, it does put the spotlight on whether this is the type of company (leading-edge, innovative) that Nortel should be pursuing as opposed to an established company (e.g. Avaya, 3Com). There are, of course, inherent risks in buying a small player that has no assurance that its technology will resonate with customers. And with VC-backed start-ups, price is an issue given investors want a healthy return on their equity.

ConSentry, which claims its switches are more efficient than Cisco, has raised $72-milion to date.

Alcatel-Lucent's Troubles

As much as the spotlight has been on Nortel’s ongoing efforts to restructure itself and reduce operating costs, it’s not the only telecom equipment supplier scrambling to remain competitive.

Alcatel-Lucent (ALU), for example, is struggling to reduce costs and deal with unions not particularly overjoyed about the prospects of watching jobs eliminated. Since Alcatel and Lucent were merged (aka Alcatel bought Lucent), the company has issued three profit warnings, and seen revenue growth stall.

For Nortel watchers, one of the Alcatel-Lucent’s trouble spots is its wireless business. In particular, its WCDMA division appears to be a bit of a mess right now given it has three products - one from Alcatel, one from Lucent and one from Nortel, which was acquired last year.

In a lengthy Financial Times article, Nomura analyst Richard Windsor said Alcatel-Lucent’s GSM and WCDMA units will have an operating loss of about €800m in 2007. Yikes!