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Cisco, Nortel Pact May See Light

Like diplomats representing historical adversaries, the CEOs of rival network equipment giants Cisco Systems and Nortel Networks have been gingerly floating a rapprochement.

Using the media as intermediary, Cisco's John Chambers said he'd "love" a partnership, to which Nortel's Bill Owens responded that he's "open" to the idea. The two men later met after a telecom industry conference in Canada, and though they didn't strike a formal agreement, the potential for one has analysts, customers and competitors taking notice and pondering the possibilities.

The Case for Cooperation

In looking for reasons to give the partnership a go, one is not hard-pressed to find them. "There are some real synergies there," said Jay Desai, founder of the think tank Institute of Global Competitiveness and a former consultant to both companies.

The customer lists are the most obvious. Cisco does 70 percent of its business with large corporations and government agencies, while Nortel has strong ties to wireline and wireless carriers and ISPs. They also share some mutual customers.

On the product side, Cisco's router, Internet Protocol telephony gear and network security software expertise complement Nortel's long-haul fiber-optic and mobile systems strengths.

The management factor, of course, plays an important role. Both are thought to have good leaders in key executive posts, though Nortel, of Brampton, Ontario, may have a slightly stronger international operation. Still, it could learn a thing or two about marketing from San Jose, Calif.-based Cisco. Chambers is a garrulous Southerner, a regular on TV and tradeshow circuits, who, because of his position and personality, serves as a kind of de facto industry spokesman. Nortel's Owens, by contrast, is more reserved.

But not only that, he has other concerns, Desai said, like making sure there are no more accounting skeletons in Nortel's closet and making key managers stay with the company. In other words, public relations isn't, and shouldn't be, his first concern.

So a Cisco pact could, perhaps, go a long way to help Nortel allay its fears about the lingering accounting scandal that chased Owens' predecessor Frank Dunn from the job.

After all, the thinking goes, Cisco wouldn't team with a company on the verge of a meltdown. (Nortel this week, delayed its annual shareholders' meeting, saying it needs more time to review its books.)

News of the CEOs' summit, on the heels of a relatively upbeat business forecast, was enough to bump up Nortel's stock.

But huge as these companies are, they can't fulfill every customer's networking needs. That's prompting these rivals, as well as others in the space, to soften their formerly standoffish, if not hostile, postures.

As an industry, Desai said, there's been too much focus on individual technologies (broadband, wireless, IP, VoIP, network security) and not enough on assembling a comprehensive offering to cut customer costs.

Desai said network equipment providers should be able to look at a customer's networking, telephony and wireless needs for five years, then provide turn-key solutions. Whatever equipment or services the vendor doesn't offer itself, it should package from partners.

So what's the next step? Industry watchers expect Cisco and Nortel to start with a small, most likely joint, development and sales and marketing agreement in a hot niche, such as broadband, wireless, IP telephony or security.

Pairing Off

Other network equipment players, especially Lucent , should be wary, Desai said. Indeed, the company isn't sitting around waiting to be buried by Cisco/Nortel.

Earlier this week, Lucent and router maker Juniper announced joint deals with Xspedius and China Unicom. The companies have also worked together to propose industry standards.

"We are looking at different areas to expand our relationship within that existing structure," said Lucent spokeswoman Denise Panyik-Dale about the company's ties with Juniper.

And just today, electronics giant Hitachi and network specialist NEC trumpeted a new joint venture to produce backbone routers in Japan beginning in October, which will have them targeting the same types of customers as Cisco and Nortel.

A representative of one major U.S. telecom carrier said without details about a Cisco/Nortel hookup, it's impossible to speculate whether the deal will be a boon for network equipment buyers.

Test Drive?

The compliments being bandied by Cisco and Nortel have led to speculation that a partnership could lead to a blockbuster merger, but both companies have been careful to squelch such a notion.

Owens has said that Nortel is a Canadian company and intends to stay one. Nor would Nortel fit in Cisco's current acquisitions strategy; it's too big.

Cisco hasn't been shy about acquisitions, but it has been much more conservative since the telecom crash. With the exception of the $500 million purchase of consumer Wi-Fi specialist Linksys, Cisco has tended to buy smaller firms for their intellectual property.

Most recently, it paid $89 million for the assets of core router maker Procket Networks. Spokespeople at Cisco and Nortel won't speculate about the budding relationship. They prefer instead to direct reporters to the public statement of the CEOs, which are long on enthusiasm and short on specifics.

Still, a commitment from the highest levels to work together is an important step, even if the final destination is unknown.

"This industry is still struggling to reinvent itself in a major way," Desai observed.