Can firms resist the real urge to merge?

While Alcatel and Lucent have been keen to position their US$13.4 billion merger as a marriage of equals, what has been abundently clear is that neither firm is as equal as it used to be. While the deal is still one of the largest in ICT history, it should be placed in the context of the market capitalisation for search giant Google, which is moving into delivering telecom services online: US$108 billion.

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By  Peter Branton Published  April 9, 2006

|~|commentissue58body.jpg|~|Lucent CEO Patricia Russo shakes hands with Alcatel CEO Serge Tchuruk.|~|While Alcatel and Lucent have been keen to position their US$13.4 billion merger as a marriage of equals, what has been abundently clear is that neither firm is as equal as it used to be. While the deal is still one of the largest in ICT history, it should be placed in the context of the market capitalisation for search giant Google, which is moving into delivering telecom services online: US$108 billion. Lucent itself had a similar market cap at one point, less than a decade ago. In the late 1990s, companies that made telecom and networking gear were some of the biggest players in the market — Cisco was briefly the largest company in the world, dwarfing old-hat software firms like Microsoft and Oracle. The firms that were making switches, routers and other networking products were seen as being in control of how data was transferred over the internet. As more and more data was to be transferred over the internet, they would be become more and more powerful — or so the reasoning went. However, that argument only worked as long as the firms in question were able to rely on the fact that their products were based on proprietary technology — technology that they made and controlled. What has happened is that the rise of the internet and open standards has made that proprietary equipment less important. While the hardware that the internet and other networks run on is still provided by a few big firms, it is less essential to the whole mix. For instance, net telephony firms like Skype (bought by eBay last year) offer voice-based services that can be accessed via any web browser. The real intelligence of the network is less and less at the centre, with the big routers and switches, and more and more at the network edge, where it is easier for the users to control it. On top of this shift in power, the equipment makers are also seeing a declining market, with their customers currently doing mergers of their own. Even here in the Middle East, where the telecoms market is being opened up as a result of liberalisation, the big firms are trying to buy up smaller players. Last week we highlighted the work of MTC Group in Kuwait, which has now established operations in 19 countries across the region. While it is still far from certain that the Alcatel and Lucent merger will go ahead, it is clear that more mergers will happen in this sector. The big firms will look at economies of scale to stay competitive, so they will need to either swallow smaller players or join forces with each other. This marriage may or may not be consumated, but there will be others — just don’t expect everybody to be happy at the reception afterwards. ||**||

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