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Prime Time for Telecom Takeovers

Private-equity firms will ramp up investments in suppliers of phone equipment and wireless handsets, said Charles Giancarlo, a managing director at Menlo Park, Calif.-based Silver Lake. While he declined to say which companies might be targeted, analysts have named Research In Motion Ltd. (RIMM), Alcatel-Lucent (ALU) and Nokia Siemens Networks Oy as potential takeovers or investment opportunities.

“It’s definitely an area that’s in great transition right now,” Giancarlo, a former Cisco Systems Inc. (CSCO) executive, said in an interview. “There’ll be more private-equity activity.”

Private-equity firms typically swoop into areas where market values of companies have dropped. That lets them snap up businesses—often through a leveraged buyout, which relies on borrowed funds—and try to engineer a turnaround. Networking-equipment makers and related companies worth at least $1 billion have an average price-to-earnings ratio of about 28. That’s less than half the ratio for software and computer-service stocks of the same size, according to data compiled by Bloomberg.

Silver Lake has backed telecommunications companies before, including Avaya Holdings Corp. and Skype Technologies SA. After a turnaround effort at Avaya, that company has filed to raise as much as $1 billion in an initial public offering. The IPO will happen as soon as April, people with knowledge of the matter said this month. Skype, meanwhile, was acquired by Microsoft Corp. (MSFT) for $8.5 billion last year.

It’s becoming harder for smaller manufacturers of phones and related equipment to compete, making them cheaper potential takeovers. Smartphones using Google Inc. (GOOG) or Apple Inc. (AAPL) software accounted for 77 percent of U.S. sales during the fourth quarter, according toComScore Inc. (SCOR). Their dominance has sidelined RIM, the maker of the BlackBerry, which has lost more than three-quarters of its market value over the past year.

RIM’s market share dropped to 16 percent in the fourth quarter, from 18.9 percent in the previous three months, Reston, Va.-based ComScore found.

“It made it very difficult for niche vendors to have a viable business model,” Giancarlo said.

An acquisition by a rival handset or mobile-software supplier is unlikely, as Google, Apple and Microsoft already have the technology they need, said Charlie Wolf, an analyst at Needham & Co. in New York. That leaves a private-equity firm as a more likely suitor.

“The stock is so low that the private-equity firms may go for it,” Wolf said.

Makers of equipment for telecommunications networks face their own challenges. Carriers have consolidated, leaving fewer potential customers. And networking companies are getting squeezed by Chinese companies, such as Huawei Technologies Co. and ZTE Corp. That’s led to stiffer price competition and weighed on stock prices.

“The threat from Huawei should not be underestimated,” said John Byrne, an analyst at Framingham, Mass.-based research firm IDC.

Alcatel, France’s largest telecommunications-equipment supplier, has lost money in five of the past six years and plans to cut as many as 1,800 jobs. The Paris-based company also has been shopping around some of its business units.

Its shares have dropped almost 50 percent in the past year, making it a steal for a potential acquirer, said Michael Mahoney, managing director at Falcon Point Capital LLC, an investment-advisory firm in San Francisco.

“The big story to me is the incredible undervaluation of Alcatel,” he said in an interview. “This stock is a screaming buy. Private equity should be all over this.”

Nokia Siemens Networks, an unprofitable venture backed by Nokia Oyj (NOK) and Siemens AG (SI), also may be a target. It said in November it would eliminate 17,000 jobs, or about 23 percent of its workforce. The company aims to divest some business units as well.

Private-equity firms may try to earn a return on their investments by breaking up companies, making more dramatic cuts or focusing on new markets.

There are many potential opportunities, Giancarlo said.

“This sector, in the consumer and carrier-equipment side, is going to be busier this year,” he said.

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