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Gores will try to resurrect a stagnant Siemens with a renewed focus

As Gores Group tries to push Siemens' telephony business back toward growth, focus and some new partnerships may prove key.

The Gores Group's acquisition of Siemens Enterprise Communications (SEN) could succeed if Gores is able to bring renewed focus to a company that was often lost in the shuffle by its parent company.

Most analysts believe Gores, a private equity firm, has the tools in place to succeed. It has two viable assets to bring to the table in Enterasys and SER Solutions. But Gores may also be able to introduce a sharp focus at SEN that Siemens AG -- Europe's largest engineering conglomerate, with more than $100 billion in annual revenues -- just could not.

The SEN deal gives the Gores Group 51% control of the new venture, which is expected to retain the Siemens name. Siemens will own the other 49%, with both parties contributing about $273 million to the joint venture.

The deal bears all the hallmarks of Gores CEO Alec Gores' past success: a faltering division, almost given away (compared to its annual income), which is struggling despite a large customer base.

Between 2005 and 2007, SEN's market share fell from 4.9% to 4%, and in that time the group cost Siemens more than $1.5 billion, according to BusinessWeek.

The spun-off company will be larger than anything else Gores has previously taken on. Though dramatic changes are going to be required to eventually build the SEN customer base again, many analysts believe that the new company has at least a strong potential for success.

The key to that success will be breaking from the old patterns that have allowed networking companies like Cisco and Avaya to take hold of a telephony market that has been slipping from Siemens' grasp.

"What's going to change the pattern? Those customers have been defecting rather quickly," said Marty Parker, principal at UniComm Consulting.

Perhaps Gores can break that pattern, he said. The company has a history of bringing renewed focus to struggling technology companies.

"They [Gores] buy companies with a large customer base and really focus on what those customers need," Parker said. Part of that means cutting duplicative offerings in favor of fewer, better-defined options.

When Gores bought VeriFone for $50 million, for example, the group slashed costly R&D projects and untested initiatives, BusinessWeek reports, instead investing in already popular products, with the result that, seven years later, the company is valued at $1.2 billion.

"There won't be four or five ways of doing everything. There will be two, max," Parker said.

After that, the company will probably try to reconcile its software and hardware strategies.

"If you look at equipment from a real high level, it's clear for anybody in the networking business, all of your value-add is going to be software," said Tom Nolle, president of consultancy CIMI Corp. Hardware is fast becoming commoditized, he added. "They have to be in software that pulls hardware through."

One possible strategy might be a tighter focus on a hosted model, which is already working quite successfully in Siemens' partnership with BT, according to Parker.

"SEN is quite a bit further along than anybody in the hosted IP telephony model," he said.

From there, when the market has matured, the company could easily expand that strategy to sell unified communications (UC) services.

"I don't think they'll lead with UC, because the market is not fully baked," Parker said. "But they will sell hosted telephony, and [they can] sell UC as an add-on to that."

The portfolio of hardware companies that Gores is bringing to the joint venture will probably help SEN achieve these goals.

The introduction of Enterasys, a network equipment and security vendor, into SEN's assets is likely to push back somewhat against the division's recent trend of focusing on software -- rather than hardware -- solutions.

But that combination may be just what SEN needs as it looks to provide a complete telephony package with an eye to a robust UC portfolio in the future, as a Gartner research note on the SEN acquisition suggested (PDF).

"The joint venture's promising unified communications portfolio and worldwide service business gives it the opportunity to build on current customer relationships with a more rounded portfolio of networking, UC and contact centers," the research piece stated.

Contact center expertise is exactly what SER Solutions brings to the table: The company sells a variety of contact management and VoIP quality assurance tools.

Overall, analysts expect that current customers of SEN, SER Solutions, and Enterasys are likely to continue receiving the support and sales they need as SEN is reorganized to attack the market more strategically.

Users of Siemens' HiPath and OpenScape product lines should "expect little change from this announcement. Continue to evaluate it for your UC needs," Gartner wrote, while advising current SER and Enterasys customers to continue deploying those products.

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