TORONTO – Lured by the promise of a better bottom line and faster time to market, high-tech giants such as Nortel Networks are trimming off weighty divisions, ranging from manufacturing to training, in multimillion-dollar deals.
"Communications equipment companies are realizing they have got to get a lot meaner and cleaner – much more streamlined," said Rob MacLellan, senior technology analyst at Research Capital Corp.
"At the end of the day, the desire is to have the firm move faster, be able to deliver products quicker to the customer, and be able to focus on what it does best," he said.
Nortel, the world's No. 2 network equipment supplier, said Thursday it will pay PricewaterhouseCoopers $625 million to run such services as human resources and training over the next five years.
The announcement comes less than 24 hours after the Brampton, Ontario-based company signed a $10-billion manufacturing contract with Solectron, a deal that includes the $900-million sale of some of Nortel's assembly plants in North America and Europe.
Nortel is not alone in trying to pare back operations to its key business – a strategy perfected by Cisco Systems, the world's largest supplier of equipment that powers the Internet, MacLellan said.
Newbridge Networks said Thursday it had signed a contract with IBM Global Services to run its support services. Newbridge would not provide financial details of the deal.
The Ottawa-area company, which France's Alcatel announced in February it would purchase for $7.1 billion, has said it wants to cut its costs to 36 percent of sales from 46 percent.
"Nortel, Newbridge, Lucent, IBM – any of the firms that grew up in the old world – have come, to varying degrees, a relatively decent way," MacLellan said. "But they still have, in my mind, a long way to go yet ... it's always hard to reinvent yourself."
The growing trend to outsourcing is seen as a boon for such contract manufacturers as Montreal-based C-MAC Industries and Toronto-based Celestica.
"Right now we are in the steep part of the curve," said Duncan Stewart, a fund manager at Tera Capital Corp. "Not everybody in the world has outsourced yet, but we're getting closer to that – at some point obviously the growth will have to slow."
Although Solectron's win of the Nortel contract was disappointing for Celestica, the deal's size was an encouraging show of demand, said Pierre-Yves Terrisse, an analyst at Yorkton Securities.
"The strong indication it sends to the market is that there are some big (contracts) out there to be won," he said.
"Solectron got Nortel, but there's such a huge growth opportunity out there that there's food for everybody."
In January, Celestica added $1.5 billion to its annual revenues under a supply and acquisition deal it struck with IBM.
Celestica, an IBM Canada Ltd. spinoff, also bought IBM plants in the United States and Italy as part of the three-year supply deal.
Terrisse said Celestica wants to bolster its Nortel sales, which now represent about 5 percent of its revenue, but the Solectron deal would likely have added excess plant capacity to its operations.
Nortel, which first announced plans to slim down in early 1999, said it is considering further such deals. Analysts suggest its repair operations are likely the next to go.
"It helps position Nortel as a more agile and fast-moving company," said Nortel spokesman David Chamberlin.
"It helps us manage our growth while we're building the high-performance Internet – it results in a greater presence for Nortel Networks in the marketplace, growth in market share, higher revenue growth and, ultimately, higher growth in earnings."
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