New Wrinkles Could Backup Optical M&A Rumor

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fibeReality recently published the article, “ADVA/ECI Merger? Hasty Knee-Jerk Effect,” in which we presented the case about the drawbacks of such a combination. While all of the arguments should still be seriously considered, we just received some new intelligence, which may point to the need for a reassessment. In the previous piece, we commented on ADVA Optical Networking’s inability to penetrate the “three largest, incumbent ISPs in the US…when it came to optical hardware.” Certainly, we recall that the supplier tried to get into AT&T in the past via an OEM arrangement with Fujitsu Network Communications, but the latter made its own product line the priority, and the former, at least at the time, was just not set up to adequately deal with all of the organizational complexity of this large service provider. However, it is our current understanding that CenturyLink, has selected its two metro optical vendors, Ciena and ADVA, which is really based on the relationship the latter had in the past with the original “Level 3 Communications.” We believe it is clear that high-level engineering executives from the ex-CLEC are in charge of network planning as opposed to their counterparts at the ex-ILEC, even though the latter actually made the acquisition. Yet, even without this latest information, in retrospect, we should have given a lot of weight to the fact that Verizon chose ECI Telecom to be its metro supplier, for its 5G buildout, and that a buyout by ADVA could possibly facilitate even greater penetration not only into Verizon, but into the other two, original tier 1 service providers in the States.

Naturally, although we have also just heard about some chatter about a big deal being in the works at ADVA, we would still not be surprised if the company and ECI remain independent. However, with the assumption of inroads into two of the dominant incumbent carriers in the US, we would suspect that all three of these operators would be encouraging such a marriage. While they are all in the midst of changing the character of their firms to varying degrees, they still want to commit to suppliers, which are not likely to disappear in the foreseeable future, and so they are still inclined to lean towards heft as opposed to lean and mean. (Additional resources will also be needed for any cases in which the high-cost, OSMINE process is still in effect in these networks.)

It is also a state of affairs in which in fibeReality’s opinion, although finally putting David Heard upfront, as the new COO, is a good, practical move for Infinera from at least an appearance perspective, we still anticipate that it is too little, too late. The firm is still offering a story about its PICs, and we do not foresee the operational advantages of the Coriant installed base making much of a difference in converting people to a technology rejected by both AT&T and Verizon in their traditional plant in the past. The good news for the vendor is that we heard that CenturyLink’s current philosophy is to go with two suppliers, but we would not bet on something close to a 50-50 split with Ciena for the long-haul application, as the more dominant player has been very aggressive on price in general in going after this account.

While such pricing tactics will not help ADVA with its gross margins, finally penetrating these large buyers of equipment provides a level of security it has not possessed in the past. Also, unlike the hyperscale data center operators, these purchasers, while very demanding, do not run their gear providers into the ground.

In closing, an ADVA-ECI marriage, could also be attractive to the tier 1s in better helping to keep Ciena honest with metro applications in that they both tend to concentrate solely in the optical space. Others, including Nokia Networks (these customers must also have doubts about its commitment level to the space), Cisco Systems, and Juniper Networks, all have bigger priorities.

As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]