Taking On The Telecom Giants

What the Israeli government is calling the largest merger in the country’s history will bring together two “premier” telecommunications companies that are expected to have a combined annual revenue next year of $1.5 billion.
ECI Telecom Ltd. and Tadiran Telecom are joining in an effort to challenge bigger competitors.
“We’re both digital telecommunications and data transmission companies,” said Leo Hinkley Jr., ECI’s investor relations manager. “We’re not carriers. We design, create, manufacture, sell and service the data transmission equipment that startup and major carriers worldwide need to service their customers.”
He said both firms specialize in international, long distance and telephone services for voice, fax and data. But because they make different products, Hinkley said duplication will be negligible and no layoffs are anticipated.
The completion of the merger, which Hinkley said is slated to occur soon but others suggested might be delayed until early next year, will allow ECI to offer its customers all of Tadiran’s “services, products and solutions. It’s in markets all around the world and there is little duplication of customers.” And it would give ECI a greater penetration into the U.S. market, where Tadiran is a more recognizable name than ECI.
“We want to make ECI a household name here,” said Hinkley.
Robert Tango, a telecommunications analyst at Tucker Anthony in Boston, predicted that the merger will cause ECI to “become well known by telecommunications carriers and investors in general once it starts penetrating the U.S. market. Tadiran has good distribution in the U.S. We are talking about two premier technology companies. I think the merger is a great move.”
He said the merger will allow the companies to expand faster than they could if they remained independent. Their chief competitors — Lucent, Siemens, Alacatel and Nortel — may be larger, said Tango, but the technology of ECI and Tadiran is “as good if not better.”
The companies are sometimes perceived “as the smaller players among the big players,” he said, but added that “they compete effectively with them every day, and they win certain business.”
Stephen Koffler, an analyst with Donaldson Lufkin Jenrette in Manhattan, pointed out that the telecommunications business is consolidating rapidly and customers prefer to buy from larger companies which offer broad solutions, such as Lucent. But he said ECI is among the major competitors of the big firms and “by combining with Tadiran, it picks up a lot of good engineers, technology and customers they did not have in the past. They will become a broader and better company … and stay competitive.”
Hinkley noted that with $230 million in cash from ECI and $80 million in cash from Tadiran, ECI’s chief executive officer, David Rubner, has announced plans to “grow the company and make other acquisitions.”
ECI had 20 years of military experience before its first commercial investment in the international telecommunications market. That occurred in 1981 when the Soviet Union announced it would not permit East Germany to increase the communications link between East Germany and the rest of the world.
It avoided that restriction by buying from ECI a device which doubled the number of calls carried on a phone line.
“So even though the Russians said no more phone lines, Deutsche Telekom was able to double its capacity,” said Hinkley.
He noted that ECI now makes a device which increases a line’s capacity tenfold, something that is important to carriers that wish to “multiply the effective capacity of their infrastructure. So a single line can now carry 10 simultaneous conversations and consumers pay a much cheaper rate.”
Hinkley said the equipment allows voice, fax and data transmission, and because the world is wired, calls can be placed anywhere “in the same fashion as if you were calling around the corner.”
ECI operates in 140 countries and has 28 major facilities, four in the United States.
“We’re with every carrier in the world,” said Hinkley. “Virtually always if you call overseas, your call will be going over our equipment.”
He noted that “Israel is second only to Silicon Valley in terms of technology, and it is moving into the No. 1 position in the telecommunications industry in terms of manufacturing equipment.”
ECI has been working with MCI in the development of broadcast quality digital television pictures. It carried the first game of the season of the Texas Rangers. At one point during the game, the satellite link that was being used to transmit the event to home viewers malfunctioned and the signal was lost. But those watching the experimental broadcast using the MCI-ECI connection saw no interruption because the game was carried over telephone wires.
In the future, Hinkley said ECI plans to work with MCI to carry broadcasts of concerts, theatrical shows, sporting events and educational presentations.
“We look for this to take off in 1999,” he said. “My understanding is that we are the only ones out there with this product.”
Asked about price, Hinkley noted that satellite owners now “call the shots because they have virtually no competition. Whether it will be cheaper I don’t know, but you will never lose the satellite link or have a degradation of the picture when you start to lose the link.”
He added that the telecommunications industry has some “insulation” from the ups and downs of the economy because “when the economy is down, our products are on a need basis. In a booming economy, it’s cheaper to buy our products than to build a new infrastructure. So our future is very, very bright.”