The so-called “mobile core” market appears to be the new target for M&A among telecom equipment makers as service provider customers expand their networks to accommodate mushrooming mobile demand.
Just one week after Cisco Systems Inc. (CSCO) bought Starent for its CDMA/LTE assets, Tellabs Inc. (TLAB) said it’s buying WiChorus for the same reasons – to help it build 3G/4G mobile networks.
Nikos Theodosopoulos, analyst for investment bank UBS, called the strategy “a natural extension” of Tellabs’ 8600 and 8800 platforms that “offers revenue synergies to ... customers.” Not only does the WiChorus buy help Tellabs continue its transformation into a next-gen Ethernet/IP company, it also helps it tackle the mobile arena, he said.
For that reason, UBS is keeping its neutral rating on Tellabs.
Illinois-based Tellabs, whose profits have plummeted over the past year, will pay $165 million for the San Jose, Calif.-headquartered WiChorus. The deal is expected to close within the next several months, Tellabs said in a press release. Until then, the two companies will continue to operate separately; after that, they’ll combine and employ about 3,250 people. Rehan Jalil, president and CEO of WiChorus, will head a new unit at Tellabs, the IP and mobile Internet group. He’ll serve as senior vice president and report to Tellabs CEO Rob Pullen.
Tellabs’ timing looks fortuitous. Theodosopoulos said the wireless data market is growing at a rate of 30-50 percent each year, which means the entire mobile core market could reach $2.6 billion by 2013. So, for Tellabs to buy a company such as WiChorus now gives it somewhat of an edge when compared to rivals (except, of course, for Cisco).
Investors may not be convinced that M&A is the best move for Tellabs, though. The company’s shares had plunged 3.68 percent to $6.54 by 11:45 a.m. Eastern, and perhaps they’re right to be concerned. Tellabs, despite its positioning in 45 of 50 top carriers worldwide, has been slammed by the recession as operators slow network build-outs. It has laid off hundreds of employees and shown declining profits for each of the past few quarters.
Tellabs will reports its third-quarter earnings on Oct. 26.
