How Nortel optical networking sale will change the industry

Nortel may be bankrupt but that doesn't mean it has no value.

The rise and fall of Nortel

Take, for instance, the company's Metro Ethernet Networks unit that Ciena is looking to buy for more than $500 million. Metro Ethernet Networks, which generated $1.36 billion in revenue for Nortel in 2008, has deployed an estimated 430,000 optical nodes to customers in 65 countries. Additionally, the Dell'Oro Group research firm found that Nortel topped its competitors in shipments of 40Gbps equipment and that it had an estimated 32% market share of 40Gbps equipment at the end of 2008. On top of all this, Nortel has a strategic partnership with AT&T, meaning that anyone who purchases the Metro Ethernet Networks will have access to the second-largest carrier in the United States.

"Nortel is very strong in terms of Layer-1 transport technology for 40G and 100G networking," says Andrew Schmitt, an analyst at Infonetics Research. "I've surveyed carriers and Nortel comes out as the leader in both 40G and 100G technology by a wide margin."

So what is likely to happen to Nortel's Metro Ethernet business? Well, first any transaction has to go through a competitive bidding process that requires the approval of both American and Canadian courts. And while Ciena has entered into a "stalking-horse" agreement with Nortel to buy the assets for $521 million, the competitive bidding process could bring in new suitors who could raise the price of the sale beyond Ciena's means. Although it's not currently known what companies will bid on the unit, Nokia Siemens, Huawei, Alcatel-Lucent and Ericsson are among the possible bidders looking to expand their optical networking businesses.

Click to see: Nortel's Metro Ethernet sales

"It isn't clear that Ciena will win the bidding," Schmitt says. "I think somebody else will step in and bid higher than Ciena to get their business. I see some challenges in terms of the overall cost and Ciena's ability to afford the transaction."

But even though Ciena might have a difficult time keeping up with competitive bids, it may well be the strongest fit for the Nortel unit, as it is the only potential bidder to have such a strong focus on optical networking equipment.

"Ciena is the most obvious purchaser because it would give them a bigger footprint and a decent boost to their business," says Gartner analyst Mark Fabbi. "They're very focused on the optical networking business and buying this Nortel unit would round them out and push them closer to the Metro Ethernet side. It would also give them more user access with some of the partnerships Nortel has formed over the years. Nortel has done a lot of work with IBM, and this deal would open up not just the carrier market by the financial services market as well."

Both Fabbi and Schmitt think that Ciena's focus on optical networking will also make it easier for the company to integrate the Nortel unit than for any of the other potential suitors. In particular, Schmitt says by investing more than half a trillion dollars in the Nortel unit, Ciena is making a "bet-the-company" move and it will thus have every incentive in the world to make the transition go smoothly.