It's been nearly a week since Nortel unveiled plans to spend US$448 million on PEC Solutions Inc., and I've got some ideas on why the deal was done. Nortel recognizes the telecom equipment market is becoming more competitive due to low-cost rivals such as Huawei Technologies. At the same time, there are signs Nortel is starting to slip from the top group, which includes Alcatel, Cisco, Nokia and Juniper. As troubling is Nortel's strategic pursuit of trying to be all things to all people - something ex-CEO Frank Dunn enthusiastically supported - is not working. Unfortunately, this scattered approach now means Nortel is not a dominant player in any market sector - at least the new and exciting ones.
So what does Nortel do? It jumps into new markets - at least for Nortel - such as the U.S. government, security and services. With limited cash resources, it has to be selective and lucky. This is where we get to PEC Solutions, a mid-tier IT systems integrator and consulting firm. Relatively speaking, PEC was an inexpensive way for Nortel to get into a market where it had little exposure - apparently due to its Canadian status. Now, Nortel CEO Bill Owens says Nortel can pursue US$10-billion of the U.S. government's US$65-billion IT budget. In theory, it looks promising but the big strategic question is why Nortel plunged into the services market by focusing on a single vertical. Why not go after a services company that covers multiple markets? Or why not make strategic technology acquisitions to get a competitive edge - much like Cisco, Alcatel and Juniper have done in the past year. With venture capital just starting to flow again, there are plenty of interesting start-ups still desperate for cash. As Scotia Capital analyst Gus Papageorgiou wrote last week, it appears Owens - supported, I guess, by COO Gary Daichendt - fell back on what he knows best: the U.S. government and military.
As for Nortel's 2004 fourth-quarter and annual results, the real story is that 2005 will be a year of modest growth, cost cutting, more focused R&D and cash management. In many respects, Nortel's at a crossroads as it grapples with what to do next. It's not like Nortel hasn't been here before in its long history but there just seems to be a lot of uncertainy.