For telecom equipment providers -- like Nortel (NYSE:NT), Lucent (NYSE:LU), Alcatel (NYSE:ALA), and Tellabs (NASDAQ:TLAB) -- the last few years have been a depression. By necessity, the equipment providers have much leaner cost structures, but it has also meant a sacrifice in terms of investments in new product lines.
Instead, innovation has come from smaller players. Look at Advanced Fibre Communications (NASDAQ:AFCI). The company is a leader in high-speed Internet access equipment. With this, a carrier can connect fiber networks with residential and business customers, otherwise known as fiber to the premises, or FTTP.
For 2004, Verizon (NYSE:VZ) plans to spend $1 billion on FTTP, and named Advanced Fibre as the primary supplier of the access equipment. It was a bold move on the part of Verizon, given that, in the telecom world, Advanced Fibre is a relatively small company.
Yesterday ended this problem, as AFC agreed to merge with Tellabs. In the deal, Advanced Fibre shareholders get 1.55 shares of Tellabs common and $7 in cash for each AFC share. The market purchase price is approximately $1.67 billion.
Tellabs is in the crusty business of aggregating traffic from telephone-carrier access networks. However, with Tellabs' long-standing relationships with the Baby Bells, there is an opportunity to further monetize Advanced Fibre's technologies. Tellabs also brings extensive distribution in global markets.
Tellabs has also been effective in its restructuring efforts. In the last quarter, the company generated a 19% increase in revenues to $263.8 million and net profits of $13.4 million. The company also has more than $1 billion in the bank.
This is a deal with a sound strategic rationale -- which is a sharp contrast from the zany telecom deals of the late 1990s. Simply put, Tellabs brings distribution and Advanced Fibre brings cutting-edge technology. It's a common-sense strategy that should be effective in capturing new capital investment in the telecom sector.
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Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any of the stocks mentioned.
