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Merger mania in telecom market

A raft of multibillion-dollar mergers offers another reminder that it's a new world for the telecom industry.

Two multibillion-dollar mergers and the roll-out of a new voice and data network--all announced this week--offer another reminder that it's a new world for the telecommunications industry.

The "urge to merge" among telcos and their suppliers carries plenty of risks, such as integrating workforces and dealing with potentially incompatible product lines--no easy task. But the risk of getting squashed by a bigger player apparently is greater for many of these companies.

In the most recent example, France's Alcatel Alsthom announced today that it is buying telecommunications equipment maker DSC Communications for $4.4 billion in stock. The deal will give Alcatel, a major telecom equipment provider abroad, a foothold in the United States and allow it to offer a broader array of products.

Alcatel's announcement comes on the heels of a merger between Tellabs and Ciena, announced yesterday. Like the Alcatel buyout, Tellabs' acquisition allows it to beef up its offerings to its customers, whose needs are growing in the wake of deregulated markets and the convergence of voice and data networks.

The most tangible sign of that migration came Tuesday, when Sprint unveiled ambitious plans to build a $2 billion network that will integrate voice and data services. Analysts say it is only a matter of time before all telcos provide similar networks, which rely on new technologies to carry data and voice traffic to customers simultaneously.

"The entire circuit switch telephony infrastructure is now obsolete, so there's a tremendous opportunity for telecommunications equipment vendors to replace it with either ATM- or Internet protocol-based equipment," said David Passmore, president of network consulting firm NetReference. As a result of the migration to data networks, "the [network equipment] suppliers are all bulking up so they can be more of a one-stop shop for the carriers."

That translates into mergers and partnerships throughout the industry. This week's merger between Tellabs and Ciena is an example of two mid-sized firms attempting to become just such a "one-stop shop" for telco services.

The move to integrated networks also is causing dominant players to go on buying binges. For example, giants in voice networking--such as Lucent Technologies, Alcatel, and Nortel--are rapidly buying up companies with expertise in moving data traffic.

Lucent has acquired both Ethernet start-up Prominet and Livingston Enterprises, which makes remote access equipment. For its part, Nortel recently bought data networking start-up Aptis Communications.

In addition, high-profile data network players such as Cisco Systems and 3Com increasingly are teaming up with companies that have expertise in voice networking. In April, Cisco announced a partnership with Ciena.

"Everyone right now is looking to be an end-to-end player and setting themselves up to be a strong competitor" in the emerging market, said Craig Johnson, principal of consulting firm The PITA Group. "The Ciscos will migrate to support voice at the same time the Lucents will get the pieces they need to compete on the data side. The snowball is starting to pick up speed."

Johnson added, however, that not all of the consolidation in the networking industry is a result of deregulation or voice and data convergence.

"There's a vertical consolidation taking place in many sectors today," including in the automotive and pharmaceutical industries, he explained. "It's a bigger-is-better mentality across the board."

Nevertheless, all three announcements this week "are indicative of the fact that data is definitely the platform of all future forms of communications," says Abhi Chaki, an analyst at Jupiter Communications. "To accommodate this shift, equipment providers have to broaden their offerings."

Tomorrow, shareholders are expected to approve another deal: Qwest's proposed LCI International.