A break in the clouds: Ciena wins Nortel's MEN

Dana Cooperson / Ovum
10 Dec 2009
00:00

On 23 November, Ciena and Nortel announced that Ciena won the auction for Nortel's optical networking (ON) and carrier Ethernet (CE) businesses, the major assets of its Metro Ethernet Networks (MEN) division. This deal, for $769 million in cash and convertible notes, clears the cloud that's been hanging over MEN for more than a year and strengthens Ciena's position as a significant fixed infrastructure supplier. Success will require swift integration.

Nortel's ON and Ethernet assets combined with Ciena's creates a strengthened number three vendor in the $15.2 billion ON market. Based on 3Q09 annualized share, Ciena is in 11th position and Nortel is a weak number three, a fraction of a share point ahead of rapidly-growing ZTE. Ciena-Nortel has a more commanding 3.5-point lead over ZTE, improved geographic and customer reach, and a strengthened position in all regions and in DWDM (metro and backbone).

The picture on the CE side is much weaker, but there is substantial upside. Our September report on the topic (Market Segment Profile: Carrier Ethernet) projected a 24% CAGR (2008-14) for CE equipment to $27 billion. Nortel exited the CE switch/router market earlier this year and Ciena is still building its CE capability. This acquisition strengthens Ciena's capabilities, but the combined company remains a minor player and will have to prove its significance with sales growth.

The positives are real…

Nortel's 40G/100G technology, if nurtured, will help Ciena reclaim the high end of the DWDM backbone segment, a critical strategic position as carriers globally look for ways to improve network capacity scaling while decreasing cost. Nortel's $300 million in annual aggregation sales finally gives Ciena a respectable chunk of the aggregation market. MEN also has interesting carrier Ethernet service management software and a strong position in enterprise private and managed networking. Ciena-Nortel should be able to tap Nortel's large installed base and customer support staff, especially in Asia where Ciena has less of a presence. Ciena can also now put its R&D organization to work on a prioritized set of packet and optical products for a range of applications, from mobile backhaul in the metro access to terabit networking in the backbone, and even attack some undersea opportunities.

…but do not guarantee success

In a best case scenario, for an acquisition of this size, it will take 12 months to work out the kinks; Nokia Siemens Networks (NSN) and Alcatel-Lucent have taken significantly longer.

It is crucial that Ciena-Nortel swiftly and clearly rationalize product lines to remove overlaps and quell customer uncertainty. The quicker and more cleanly this can be done, the better - even if some customers are upset that their favorite products are discontinued. Neither company's revenue trajectories are positive (their ON revenues have been sinking faster than the market average during the recession), and uncertainty will not improve this.

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