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Nortel Makes Acquisition
By Mark Evans | April 26, 2005
As part of its strategic appetite for more U.S. government business, Nortel is spending US$448 million to buy an IT services firm, PEC Solutions Inc. “Nortel is playing to win….,” said Nortel CEO Bill Owens, who appears to have made this phrase a corporate mantra given how often it has appeared in press releases recently. PEC makes it money by selling consulting and system integration services to homeland security, law enforcement, intelligence, defense and civilian agencies. In 2004, PEC had profits of $16.4 million on sales of $202.7 million but its profitability has declined for the past two years. Nortel's willingness to snag PEC is reflected in the sweet premium it is offering. Nortel is offering $15.50 a share for PEC, which closed yesterday at $11.31 on Nasdaq.
It is an interesting deal for a couple reasons: one, it is focused on services rather than technology. As competition in the equipment market becomes more intense, services are now an important differentiator. Huawei, for example, can sell inexpensive equipment but it has a hard time matching blue-chip suppliers when it comes to servicing clients. While this is a logical move for Nortel, it stll has some technology holes to fill, particularly in the router and IP market. There are rumors the Neptune router may not make its official debut until later this year, while a partnership with Avici Systems appears to be struggling given Avici's troubles.
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