Attention Shifts to Cavium After Broadcom’s Announced Buy of NetLogic

As most of you will know by now, Broadcom announced the acquisition of NetLogic Microsystems earlier this morning. The deal, expected to close in the first half of 2012, involves Broadcom paying out $3.7 billion in cash, or about $50 per NetLogic (NETL) share. For NetLogic shareholders, that’s a 57-percent premium on the company’s closing share price on Friday, September 9.

Sharp Premium

The sharp premium suggests a couple possibilities. One is that Broadcom had competition for NetLogic. Given that Frank Quattrone’s investment bank, Qatalyst Partners, served as an adviser to NetLogic, it’s certainly possible that a lively market existed for the seller. Another possibility is that Broadcom wanted to make a preemptive strike, issuing a bid that it knew would pass muster with NetLogic’s board and shareholders, while also precluding the emergence of a competitive bid.

Either way, both companies’ boards have approved the deal, which now awaits regulatory clearance and an approbatory nod from NetLogics’ shareholders.

In a press release announcing the acquisition, Broadcom provided an official rationale for the move:

Deal Rationale

“The acquisition meaningfully extends Broadcom’s infrastructure portfolio with a number of critical new product lines and technologies, including knowledge-based processors, multi-core embedded processors, and digital front-end processors, each of which offers industry-leading performance and capabilities. The combination enables Broadcom to deliver best-in-class, seamlessly-integrated network infrastructure platforms to its customers, reducing both their time-to-market and their development costs.”

Said Scott McGregor, Broadcom’s president and CEO:

“This transaction delivers on all fronts for Broadcom’s shareholders — strategic fit, leading-edge technology and significant financial upside. With NetLogic Microsystems, Broadcom is acquiring a leading multi-core embedded processor solution, market leading knowledge-based processors, and unique digital front-end technology for wireless base stations that are key enablers for the next generation infrastructure build-out. Broadcom is now better positioned to meet growing customer demand for integrated, end-to-end communications and processing platforms for network infrastructure.”

“Today’s transaction is consistent with Broadcom’s strategic portfolio review process and with our focus on value creation through disciplined capital allocation while delivering best-in-class platforms for customers in the fastest growing segments of the communications industry.”

Sensible Move for Broadcom

Indeed, the transaction makes a lot of sense for Broadcom. Even though obtaining NetLogic’s technology for wireless base stations undoubtedly was a key business driver behind the deal, NetLogic addresses other markets that will be of value to Broadcom. Some of NetLogic’s latest commercial offerings are applicable to data- plane processing in large routers, security appliances,  network-attached storage and storage-area networking, next-generation cellular networks, and other communications equipment. The deal should Broadcom bolster its presence with existing customers and perhaps help it drive into some new accounts.

NetLogic’s primary competitors are Cavium Networks (CAVM) and Freescale Semiconductor (FSL). Considering Broadcom’s strategic requirements and the capabilities of the prospective acquisition candidates, NetLogic seems to offer the greatest upside, the lowest risk profile, and the fewest product overlaps.

Now the market’s attention will turn to Cavium, which was valued at $1.51 billion as of last Friday, before today’s transaction was announced, but whose shares are up more than seven percent in early trade this morning.

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Guarded Optimism on Alcatel-Lucent

Since being created as a result of the 2006 merger of the two companies that confer its name, Alcatel-Lucent has struggled unsuccessfully to reach profitability. It’s still struggling for financial stability, but some market watchers and analysts believe there’s light at the end of the tunnel. What’s more, they believe the light in question isn’t coming from an onrushing train.

There is reason for guarded optimism. Operationally and strategically, Alcatel-Lucent is on firmer ground than it has been for quite some time, even in the face of stiff macroeconomic winds and a chronic component shortage that has affected the company’s ability to deliver products.

You’ll notice, though, that I employed a qualifying adjective in the first sentence of the preceding paragraph. Alcatel-Lucent still has work to do.

The company depends on the sustainability of a real broad-based recovery in the global economy — carriers will constrain their network-infrastructure spending if they believe smartphone-toting consumers will curtail their consumption of data-rich applications and data services — and it must work harder to make headway in emerging markets. In the latest quarter, North America carried the day for AlcaLu, and numbers everywhere else were down.

Moreover, as Ray LeMaistre notes and documents at Light Reading, Alcatel-Lucent needs better growth from its Applications and Services divisions, which are strategically important to the company’s long-term prospects. AlcaLu is looking to differentiate itself from lower-cost Chinese network-equipment rivals such as Huawei and ZTE by providing software-led value with its Application Enablement strategy, buttressed by its Developer Platform and its Open API Service.

By bringing developers and carriers together, and providing integration services bridging the two camps, Alcatel-Lucent hopes to make itself more valuable to both. There’s still time for the strategy to play out, but higher rates of growth from those parts of the business would be encouraging.

At NSN, Nokia and Siemens Still Grope for Exit

Let’s say two companies are involved in a joint venture that’s been an unhappy marriage. The relationship isn’t as toxic as the former partnership between Mel Gibson and Oksana Grigorieva, but it hasn’t been a day at the beach, either. Neither partner wants to remain in the business alliance; they’re both looking for a dignified exit.

With logic and reason as your guides, what would you expect their next moves to be?

Yes, one partner might approach the other, looking to sell its interest in full. It’s also possible that one company might sell its interest to an approved third party, offering a right of first refusal to its JV partner. It’s also conceivable that both partners would put the joint venture on the block, hiring an agent to discreet present it to private-equity shops and strategic buyers. They might even consider putting some lipstick on the pig and trying an IPO, hoping to benefit from auspicious timing and favorable lighting.

Okay, now throw logic and reason to the wind. What would you do now?

Maybe, as Nokia and Siemens have done at Nokia Siemens Networks (NSN), you’d compound the unhappy union by acquiring a floundering telecommunications-equipment business from a vendor eager to unload it. Misery loves company, after all, so why not plunge headlong into the pit of despair? If you put on your absurdist bifocals, the move just might make sense on a surreal existential level. But we’re talking business, not Dadaism.

Just when I think there’s nothing in this crazy industry that can surprise me, something does just that. I admit, I’ve been puzzling over why NSN would buy Motorola’s networks business, which retains some wireless-operator customers, especially in North America, but also carries hefty baggage in the form of a product portfolio predicated on technologies (a large portion of its 3G gear, and its WiMAX 4G offerings) that have gone out of fashion. NSN will pay $1.2 billion for the Motorola unit, and — other than some modest scale and a minor ostensible market-share gain — I don’t see how it derives much benefit from the transaction.

Squeezed from all angles, from traditional competitors Ericsson and Alcatel-Lucent and from hard-charging Huawei — when it’s not fighting an intellectual-property lawsuit launched by, of all vendors, Motorola — NSN isn’t a thriving business. As I have mentioned previously, its joint-venture partners have taken massive goodwill writedowns since forming the business back in 2007.

Digressing for a moment, I want to note that I am not a proponent of joint ventures. Many European companies seem favorably disposed to them, and I understand the underlying reasoning behind them: pool resources, share and mitigate risk, eliminate distraction to one’s core business. Unfortunately, they’re usually unworkable in practice. It’s hard enough getting people from the same company to agree on strategy and to execute successfully. When you have the political machinations inherent in a joint venture, well, the job becomes nearly impossible.

Getting back on track after that brief digressive detour, NSN is in a tough spot.

How tough became clear to me after I read an article in the Wall Street Journal yesterday. Neither Nokia nor Siemens wants to continue participating in the joint venture, but they can’t find a way out. It’s as if Jean-Paul Sartre has rewritten No Exit and staged it in a boardroom. Hell is having to deal with other people in a joint venture.

Nortel Plays Its Last Hand as it Solicits Bids for LTE Patents

I’m trying to make sense of the latest strategic leaks form the cratered, smoking compound once known as Nortel Networks.

Dow Jones Newswires reported last week that, “according to people familiar with the matter,” Nortel has yet to decide whether it will sell its remaining patent portfolio, which includes a large number of potentially valuable LTE patents, or to license them as part of the newfangled lawyer-driven business model that is all the rage in the courtrooms of East Texas.

Here’s an excerpt from the Dow article, as published online by the Wall Street Journal:

Nortel, which is being advised by Lazard and Global IP Law Group, is divided internally over whether to sell some or all its patents or whether to retain ownership and monetize the portfolio through a licensing program, according to people familiar with the matter. “There are still people at the company that want to license (the patents),” said a person familiar with the matter, adding that the portfolio consists of about 4,000 issued patents worldwide.

The solicitation of bids is aimed at determining how much the patents might fetch in an outright sale, the person added. “If they don’t get much interest,” the company will push for a licensing strategy, the person said. Ultimately, the fate of the portfolio rests with creditors.

But there’s the key to understanding what is likely to happen. If you were a Nortel creditor — and, for all I know, some of you might actually be Nortel creditors — which option would you prefer? Would you rather sell the patent portfolio, perhaps for somewhere in the vicinity of $1 billion (a nice neighborhood, by all accounts) to somebody like Research In Motion; or would you take your chances on a licensing business that will defer your financial gratification and realize diminishing returns on assets that will depreciate over time?

All things considered, you smart folks would want to pursue the sale, presuming you can attract a sufficiently attractive bid for the patent portfolio. That’s what I suspect all this talk about going into the licensing business is intended to achieve.

Nortel’s advisors at Lazard and Global IP Law Group aren’t saddling up for their first rodeo, and they want to set the stage for a bidding war that will ensure Nortel’s creditors get full value for what remains of the once-formidable company’s remaining intellectual property. They’re already soliciting bids, employing a stringent NDA that insists upon confidentiality regarding signing of the NDA itself as well as of the talks it facilitates.

Nortel and its creditors will be hoping an attractive offer precludes the company from having to become an IP-licensing outfit.

Despite Scuttlebutt, No News on Sale of Nortel LTE Patents

Many of you dear readers have an abiding interest in the fate of Nortel’s LTE patents, which represent a treasure trove to some and a collection of depreciating assets to others. Regardless of whether you perceive Nortel’s LTE patents as a glass half full or one that’s half empty, you probably will concede that they represent the last major asset pool under insolvent Nortel’s sagging corporate roof.

So, to whom are those patents going and at what price?

Despite the expectant buzz regarding an imminent auction or other disposition, Nortel appears in no hurry to resolve the matter. A Nortel spokesperson today, replying via email, had “no idea” on when or whether an auction or sale would be announced.

I have a feeling it won’t be too long before news surfaces. Nortel’s creditors will want to realize the value the patents represent.

Cisco Invests in Smart-Grid Management Vendor

Cisco doesn’t fall in love with technology, but it is enamored of big market opportunities.

As such, Cisco’s unspecified investment in smart-grid management vendor Grid Net shouldn’t be construed so much as a bet on WiMAX than as a hedged wager on utilities requiring more than relatively low-bandwidth wireless mesh networks to carry all the aggregated traffic that will be generated by multitudes of embedded devices.

Oh, and Cisco probably liked Grid Net’s existing partners, which include previous investors Intel and General Electric. Both companies stand to benefit from Grid Net’s success, and from the proliferation of WiMAX somewhere other than in the 4G networks of wireless operators, most of whom are gravitating toward LTE, WiMAX’s nemesis.

Bear in mind, too, that utilities — who can’t have their networks go down — are inherently cautious entities that prize reliability above all else. They tend to avoid doing business with startup companies, favoring tried-and-true suppliers such as GE. That GE already was in Grid Net’s corner no doubt figured favorably in Cisco’s calculations.

One other factor played a role, too. Grid Net competes against Silver Spring Networks, an IPO-bound vendor of smart-grid management systems that Cisco views as a looming threat, what some have even called an aspiring Cisco of the smart grid.

Not surprisingly, Cisco wants to be the Cisco of the smart grid.

Patent-Licensing Companies Signal Interest in Nortel’s LTE Portfolio

Although debate rages about the approximate value of Nortel’s unsold LTE and other wireless patents, a market for those patents is sure to materialize when the insolvent former telecommunications giant finally decides how to dispose of them.

Nortel retains more than 3,000 (some reports say 4,000) patents, many relating to OFDMA, MIMO, and other key attributes of LTE. It now must decide whether it will auction the patents, fold them into a joint venture with a partner company, or keep them and pursue long-term licensing agreements with its former competitors and technology partners.

I have seen estimates of the patents’ worth ranging from $400 million to $1 billion. Ultimately the market will determine value. Nortel’s creditors, not inclined to draw out the process, would prefer to see the patents auctioned rather than consigned to a joint venture or an ongoing business.

Two patent-hoarding companies already have voiced interest in bidding on the Nortel patents.

One is Wi-LAN Inc., which has about 800 of its own patents and annual revenue in its latest fiscal year of C$35.4 million. To consummate a deal for the patents, Wi-LAN might have to create a separate company, with institutional investors providing the necessary capital. Unless there isn’t much of a market for the Nortel patent portfolio, I don’t think Wi-LAN will come away with the prize.

The other party that has expressed a strong public interest in the patents is Mosaid Technologies Inc. In a Reuters story published earlier today, Mosaid’s CEO said his company is prepared for a “highly competitive auction process” for Nortel’s patents.

Said John Lindgren, Mosaid’s CEO:

“The one that is getting the most market attention is the LTE patents and we certainly do have an interest in those.”

“There are some patents that we see as very attractive. We find diamonds in the rock quite a bit. We got our eyes on the specific areas.”

Mosaid has 1,915 patents, but none relating to LTE. Like Wi-LAN, Mosaid might not have the financial resources to prevail in a competitive auction. Like Nortel, Mosaid and Wi-LAN are headquartered in Canada.

Another Canadian company, with considerably more resources at its disposal, already has expressed clear interest in Nortel’s LTE patent portfolio. That company, Research In Motion (RIM), could easily outgun Wi-LAN or Mosaid in an auction. Nortel’s creditors obviously will prefer the highest bid.

If Wi-LAN and Mosaid are RIM’s only competition for Nortel’s LTE patents, you’d have to like the BlackBerry vendor’s chances.

Cisco’s Quiet Exit from WiMAX RAN Business

Cisco apparently has decided to leave the WiMAX radio-access networks (RAN) market. Many observers question why the company got into the space in the first place.

Cisco entered the WiMAX RAN business with its $330 million acquisition of Navini Networks in 2007. It was considered an odd move, because Cisco traditionally had focused on the IP networks for wireless operators rather than on radio base stations.

Evidently Cisco has decided to revisit its former strategy. In an email message to FierceBroadbandWireless, Cisco spokeswoman Jennifer Buchhalter wrote the following:

“After careful review, our mobility strategy is to focus on providing a radio-agnostic IP end-to-end mobile multimedia services network. Cisco will continue to focus on the packet core and to also focus on investment in radio technologies such as femtocells and WiFi. As part of this decision, we have decided to discontinue designing and building new WiMAX base stations. We believe the best way for Cisco to serve our customers is by delivering value at the edge and the core of our customers’ networks.”

Well, yes, that makes sense; but, again, it makes one wonder why CIsco pursued the digressive strategy that saw it acquire Navini for more than chicken feed back in 2007.

Was it just to jumpstart 4G RAN adoption, which now will be taken forward by LTE rather than WiMAX deployments? Cisco benefits from sales of IP cores that support 4G networks, and it’s conceivable that Cisco thought the market needed a push. (Intel has a well-established pattern of serving as a catalyst in nascent technology segments that it sees as integral to the sales growth of its own products, and Cisco is not averse to taking a similar tack.)

Nonetheless, it’s interesting that the Cisco spokesman doesn’t specifically address LTE. One might reasonably assume that Cisco has no need to get into turf wars with well-established LTE RAN vendors. It wouldn’t play to Cisco’s strengths, and that market doesn’t seem to need any pump priming.

Moving IP-based content, including video, across wireless operators’ networks should be enough for the data-networking colossus.

Nortel Ponders Fate of LTE Patents

Not much remains of the once-proud Nortel Networks, but it retains a portfolio of 4,000 LTE and other wireless patents that have market value of as much as $1 billion, according to analyst estimates.

For a time, Nortel considered keeping the patents. Some within the disintegrating, insolvent company envisioned that it could be recast as a patent troll, staffed with more lawyers than engineers, punitively pursuing companies perceived to have encroached on its intellectual-property rights.

It still might choose that option, but other possibilities loom.

According to report in the Globe and Mail, Nortel is “exploring strategic alternatives to maximize the value” of the patents. The company has yet to decide how it will dispose of the patents, but alternatives apparently include an auction of the patents, a joint venture with a new partner, or long-term licensing agreements with wireless companies. That last option is a euphemism for becoming a patent troll.

What remains of the Nortel braintrust might be disinclined to auction the patents, but the Globe and Mail says the company faces mounting pressure from anxious creditors, suppliers, and pensioners who want all the assets divested.

While Nokia Corp. and Telefon AB LM Ericsson are said to have privately expressed interest in acquiring the patents, RIM bears watching in this context. Nortel’s LTE patents were and are of great interest to the BlackBerry purveyor.

Unlike the other potential acquirers, RIM can play the Canadian card to put pressure on the country’s federal government, arguing that such forward-looking intellectual property should remain in Canadian hands.

Just when we thought all the juice had been squeezed from the Nortel lemon, there might be one last lemonade sale.

Motorola Division Up for Sale: WSJ

Sources have told the Wall Street Journal that Motorola is preparing to sell its home and networks mobility division for approximately $4.5 billion.

The article, quoting “people familiar with the matter,” says potential acquirers include private-equity firms and telecommunications-equipment vendors.

Allegedly among the private-equity firms considering the purchase are TPG and Silver Lake Partners, both of which are said to be attracted to the division’s continuing profitability. On the other side of the aisle, equipment vendors said to be candidates to purchase all or part of the division include South Korea’s Samsung Electronics Co., China’s Huawei Technologies Co., Sweden’s L.M. Ericsson and Pace PLC of the U.K.

Not surprisingly, neither the private-equity firms nor the gear vendors have anything significant to say about their rumored interest in Motorola’s assets.

J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. are said to be advising Motorola on the sale of its home and networks mobility division, which is now Motorola’s largest.

It includes core and edge network products, such as two-way digital video headend systems and bandwidth-management systems, along with related software; access-network products and technologies, including those supporting GPON (Gigabit Passive Optical Networking), CMTS (Cable Modem Termination Systems), BAN (Broadband Access Network) and FTTx (fiber to the home or enterprise); wireless-network infrastructure for 3G and 4G networks, including LTE and WiMAX; and customer-premise equipment, such as digital set-top boxes, DSL and cable modems, residential gateways, and WiMAX modems.

Considering that the division’s product portfolio is so varied, it’s conceivable that it Motorola could sell parts of it to at least two different buyers. For example – and this is only hypothetical – Samsung or Pace might purchase the customer-premise equipment and the access-network products and technologies, with Ericsson or Huawei buying the wireless-network infrastructure. Alternatively, Motorola might decide to keep the wireless infrastructure and sell the remainder of the division.

The mooted sale of the home and networks mobility division follows a nosedive in Motorola’s financial performance that effectively torpedoed the company’s plans to spin off its handset business, which hasn’t had a hit since the Razr climbed to the top of the sales charts several years ago. Of course, Motorola is hoping that its geekily marketed Droid smartphone reverses its declining handset fortunes.

Motorola says it maintains its commitment to a long-term plan that would split the company into two businesses: mobile devices and broadband mobility solutions.

Ericsson: Problems with JVs, Challenges in Core Market

Earlier this week, Ericsson announced quarterly financial results that were significantly wide of the mark.

Some observers blamed the disappointment on difficulties experienced by its handset and semiconductor joint ventures, with Sony and ST Micro, respectively.

There is no question that Ericsson must fix those joint ventures or bail on them. In conjunction with Sony, it seems to be working on a plan that might rescue Sony Ericsson from handset oblivion. The prospects for its joint venture with ST Micro seem less sanguine.

Still, irrespective of those issues, Ericsson has a looming problem in its core wireless-networking business that the company might have difficulty surmounting. The problem isn’t just the global economic downturn, which has had a severe impact on Ericsson’s business in many developing countries, where credit remains exceptionally tight.

Eventually, upgrade cycles will visit wireless operators in North America and Europe, and buildouts of 3G networks will continue in developing markets such as China, India.

What is at issue, though, is whether Ericsson can hold its margins and market share against strengthening competition from Chinese vendors, principally Huawei, but also ZTE. Both companies stand to take sizable business in their home country, as one might expect, but they are becoming formidable competitors in Europe and North America, too.

Numbers from market researchers Technology Business Research (TBR) and from Dell’Oro Group demonstrate that Huawei, in particular, is gaining share in wireless-network infrastructure.

According to Dell’Oro, Ericsson remains the pole sitter, holding 32-percent market share in the second quarter, unchanged from its performance in the same quarter a year earlier. Nokia Siemens remained the second-largest vendor with a 20 percent share — representing a loss of ground from the prior year — while third-place Huawei gained to 17 percent.

For its part, TBR says Ericsson is holding its own, walking a fine line between growth and profitability, continuing its gradual migration to a services-led approach in its customer engagements with wireless operators. Ericsson will need that services-led margin, because Huawei is charging hard.

Said John Byrne, a research director at TBR:

“With clear momentum in EMEA and an increasing focus on North America, both Huawei and ZTE are well-positioned to continue to take market share away from Western vendors, especially Alcatel-Lucent and Nokia Siemens.”

Ericsson isn’t immune from the competitive threat posed by Huawei and ZTE. Said Fredrik Thoresen, an analyst at DnB NOR in Oslo, Norway:

“There’s fierce price competition from companies like Huawei and we may see some of that coming through in Ericsson’s numbers.”

That services-led effort, then, becomes key for Ericsson. Its product margins will be under pressure from Chinese vendors that are renowned for offering capable, competitive priced gear.

Carl-Henric Svanberg, the departing Ericsson CEO who will be setting up shop in the big chair at BP (yes, that BP), was chagrined at having to meet what he considered unreasonable market expectations.

“We have said all along that it would be unrealistic that we wouldn’t be affected by the downturn. Some of the expectations out there were a bit high.”

“What we are seeing right now is the new projects that were planned nine months or a year ago when the financial crisis was much tougher. Now everyone understands we are moving to safer territory but it takes time for operators to plan.”

So, even though the company acquired insolvent Nortel’s wireless-network assets for $1.13 billion, beating a bid from Nokia Siemens, it isn’t counting on a quick turnaround. Despite better prospects beginning to emerge from wireless operators in North America, Europe, China, and India, Ericsson’s other developing-world markets remain constrained by a paucity of credit.

Notoriously reticent, Ericsson won’t provide clear visibility or strong guidance regarding its own expectations. Excluding the problems it is having with its joint ventures, the company has tough challenges ahead. Those come not only from inclement markets, but from stiffening competition.

If Cisco were to jump into the wireless-networks fray, as some suspect it might after its purchase of Starent, the game could get even tougher.

RAN Acquisition Would Give Cisco Complete Mobile-Data Solution

Another interesting aspect of yesterday’s Network World piece on the aftermath of Cisco’s Starent acquisition is an assessment by Catharine Trebnick, senior telecom analyst at Avian Securities, that Cisco is just one acquisition away from having a complete end-to-end mobile-data solution to offer wireless operators.

With Starent in the fold, Trebnick says, Cisco needs only the radio access network (RAN) component to fill out a complete wireless-equipment product portfolio that would put it into direct competition “with traditional end-to-end mobile-network suppliers such as Ericsson, Nokia Siemens Networks, Huawei, and Alcatel-Lucent.”

Given the problems Nokia Siemens Networks is experiencing — with its JV partners having to take massive goodwill writedowns and with market-share losses steadily accumulating — all it needs is another major competitor trying to displace it from carrier accounts.