It seems that every time I write about the telecommunications industry, my thoughts slip back to my proud days at the Standard & Poor's Equity Group. My friend Rob Gold used to say to me, "Is telecom ever going to come back?" As a New Yorker, I would inevitably say, "Yeah, when the Red Sox win the World Series."
Well, the Sox have finally won the World Series, so I guess it's about time the telecom industry shows some signs of life. Two recent developments, one solid and the other based solely on conjecture, have started to make waves in a previously stagnant telecom investor pool.
Although I never read tabloids (at least never read them frequently), I think I'll start with the hot rumor in the telecom services industry. Whispers have turned to print lately about the potential merger talk between Nextel (NASDAQ:NXTL) and Sprint (NYSE:FON). My cerebral reflex is to dismiss these rumors based on the fact that Sprint is past its prime and Nextel is a company on the rise.
My mother always said to trust my first instinct, so I will stick with my opinion that the deal would make absolutely no sense for Nextel (although the Nextel and Sprint shares both posted solid gains Thursday). Nextel and Sprint have similar $30-plus billion market caps, but much of Sprint's corporate assets are outside the wireless industry, whereas Nextel lives and breathes wireless. Nextel is a business-focused dynamo, serving 95% of the Fortune 500 companies, while Sprint has struggled at times with a stagnant consumer base.
On a pure wireless basis, it is debatable whether Nextel's integrated Digital Enhanced Network (iDEN) technology (developed by Motorola (NYSE:MOT)) would mesh successfully with Sprint's nationwide PCS (personal communications services) network. This potential merger would look a lot like the failed merger years ago between WorldCom (NASDAQ:MCIP) and Sprint. WorldCom had wanted to purchase only Sprint's wireless assets but wound up agreeing to buy the whole cow (the rest of WorldCom's catastrophic downfall is Wall Street history).
In the other development, shares of telecom/communications equipment and network specialist Ciena (NASDAQ:CIEN) climbed more than 30% (to around $3) Thursday as a result of robust fourth-quarter sales combined with a very optimistic sales forecast. The company woke up telecom fans with an eye-popping 16% increase in revenue and then followed that up with a 7% to 10% sales growth forecast (analysts expected flat sales) for the first quarter. This comes from a company that had trouble creating a spark while "rubbing two wet sticks together" for quite some time.
Positioning is key in any industry, but it is especially applicable for the telecom players. These companies have spent years trying to step out of quicksand and onto some terra firma. It's no accident that Ciena has turned a corner, although there is still much work to do.
As far as the Nextel/Sprint grumblings, I see Nextel as a highly successful niche player that should stick to internal growth until the right deal comes along. The telecom industry should have learned in the 1990s that bigger is not always better.
Call someone you love and then dial up these other views:
Fool contributor Phil Wohl spent over 12 years on Wall Street and does not own shares in any of the company's mentioned above.
