The Deal
Saturday, November 21, 
9:06 am

The latest telecom bubble?

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When struggling Nortel Networks Corp. agreed to a $448 million acquisition of PEC Solutions Inc. earlier this year, it looked like a smart way for the plodding telecommunications equipment maker to enter some new growth markets. PEC sells high-tech equipment to U.S. government agencies, and Nortel, based in Brampton, Ontario, said the acquisition would help it compete in the lucrative government contracting market without the restrictions foreign companies usually face.

As the argument went, government contracting offered a more stable source of sales at a time when large corporations were carefully watching, and often cutting back, on their high-tech spending.

It sounded reasonable. In high-tech centers far from the nation's capital, after all, it is not hard to imagine the U.S. government as a hub of tech activity, with all sorts of different agencies sparing no expense on the latest software and communications equipment to make operations run more securely and efficiently.

But a column published Friday in the Washington Post suggests the government contracting sector may hold more hype than substance for the telecom industry and that Washington D.C. could become the site of the latest telecom bubble.

Post columnist Steven Perlstein argues that Nortel grossly overpaid for PEC — a 38% premium over PEC's stock price at a time when a 10 percent multiple was considered rich.

He was similarly skeptical about Ciena Corp.'s recent announcement that it was launching a "government solutions" subsidiary. Linthicum, Md.-based Ciena has been struggling for years to turn around its telecom equipment business, and many of its recent acquisitions have been regarded as stabs in the dark rather than smart strategic moves.

From his perch at what would be ground zero for this explosive new contracting market, Perlstein gave a similar review of Ciena's new government solutions move, suggesting it was just "the latest in a series of strategic repositionings that has only frittered away Ciena's substantial pile of cash." — Andrea Orr

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Comments

From: Telecommunications Solutions,

very interesting - thank you for nice and useful article

regards
TT


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