Nortel Exits Optical, End of an Era

For those of us who’ve been following the rise of optical networks, today will go down as a red-letter day for the industry. Nortel (s NT), whose name has long been synonymous with optical networking gear, has announced it will sell off its Metro Ethernet Networks (optical and 40G) business, as a way to shore up rest of the company and focus on 4G and related technologies.

The news of the divestiture of the optical unit came along with news of lower revenues for the third quarter of 2008. Nortel blamed a slowdown in capital spending at the carriers for this revenue shortfall. Sprint and Verizon are two key customers of Nortel. The optical networking unit may have come under pressure because of British Telecom which has been retweaking their capital spending as well.

Back in the mid-90s, long before Ciena became the darling of long-distance providers, Nortel sold optical gear by the billions to carriers such as Qwest. It was a company that, alongside Lucent, controlled the demand for gear from incumbent phone companies as well. As the bubble rose so did the fortunes of Nortel. Like many telecom industry players, Nortel got drunk on success and made a series of stupid mistakes that led to the slow-motion decline in its fortunes since then. I wrote about the company’s fall in my book, Broadbandits: Inside the $750 Billion Telecom Heist.

Nortel, like many other telecom equipment makers, has suffered because of carrier consolidation that has taken profits out of the gear business. The rise of Chinese vendors such as Huawei has put further deflationary pressure on companies like Nortel, Alcatel-Lucent (s ALA) and Siemens. That said, Nortel’s business unit is a good one for anyone looking to buy.

According to RBC Capital Markets estimates, the Metro Ethernet-40G optical business is estimated to be about $1.7 billion in sales 2009. It is one of the faster growing parts of the company with the annual growth rate of about 10 percent. Despite all its problems, Nortel’s optical division still has one of the best teams, products and of course new technologies.

Nokia Seimens Networks could be a good candidate to snap up this business. Apart from that, there aren’t many takers. Ciena (s CIEN) doesn’t have the market capitalization. Some Asian vendor might be interested in this business, but the buyers are far and few. It is a damn shame that the company that should buy this company — Juniper Networks (s JNPR) — has not been aggressive in bulking up. Nortel’s optical business unit could give it enough oomph to make Cisco (s CSCO) pause. Of course, a combination with Tellabs would make sense too, but I would make that a long shot.