While the two companies have had discussions for some time, a deal isn't imminent and the talks could break down at any time, these people warned. Indeed, a potential transaction would be highly complicated, so there is a significant possibility that the two sides might not be able to reach agreement.

A transaction would be primarily a stock swap and could result in Nortel owning more than 50 per cent of Corning, eventhough Corning would be the acquirer and maintaining its independence. That could present a problem, since Corning supplies parts to several fibre-optic companies. Some customers might not be comfortable with Nortel's equity stake in such a big supplier. Nortel and Corning have been discussing a host of governance issues to address such concerns.

A spokesman for Corning, based in Corning, NY, declined to comment. A spokesman for Nortel, based in Brampton, Ontario, said the company doesn't comment on "rumour and speculation."

Nortel Networks, which had $21.3 billion in revenue last year, has been seeking ways to unlock the value of its components business, which makes lasers and other parts that the company assembles into high-capacity transmission systems for sending data through fiber-optic networks. In May, Nortel folded its optical-components operations into one unit called High Performance Optical Components Solutions. That raised speculation that the company could be seeking to take the unit public or merge it with another company. Nortel uses its own parts and buys components from such suppliers as JDS Uniphase Corp and SDL Inc, both of San Jose, Calif, as well as Corning.

Nortel's optical-components business, by some estimates, has revenue of about $1 billion. A $100 billion price tag for a $1 billion business may seem unusual, but the business has been growing rapidly. Furthermore, Wall Street has been valuing independent companies in the components business at astronomical multiples, especially as major manufacturers move to team up so they can add capacity and develop higher-performing products to keep up with surging demand for fibre-optic equipment.

Just two weeks ago, JDS Uniphase edged out Corning to clinch a deal to acquire SDL, a maker of lasers and amplifiers for fiber-optic communications systems. SDL reported revenue for the first six months of the year of only $182.7 million, but was sold in a stock-swap deal initially valued at $41 billion.

By that measure, a price of $100 billion or more for Nortel's components business might not seem too far-fetched.

Lucent Technologies Inc last week announced plans to spin off its microelectronics division, which makes computer chips, lasers and gear used in optical networks. That division could be valued at more than $50 billion as a publicly traded company, analysts say.

Even if Nortel and Corning don't strike a deal, the discussions reflect the consolidation pressure sweeping the optical-parts industry, as well as the lofty prices attached to such businesses.

Both Nortel and Corning's stocks have been on a tear, with Nortel up 259 per cent during the past 12 months, giving the Canadian company a market capitalisation of $240.5 billion. Even with that run-up, some analysts have said investors aren't recognising the value of the components business.

Corning is up 290 per cent in the same time period and has a market value of $80.5 billion. Investors are recognising the company's transformation to a producer focused on fibre-optic and components and other high-tech glass products, from a diversified concern involved in everything from glass casseroles to medical testing.

For Corning, a deal with Nortel would further its goal of becoming a one-stop shop for companies building the telecommunications backbone of the Internet. During the past year, the company has expanded its reach into areas such as fibre-optic cable (Corning previously sold raw fibre to others to bundle into cables) as well as into higher-value optical components such as lasers. Nortel is a major producer of lasers and would give Corning added muscle in this crucial field. Lasers are used to shoot beams of light along fiber-optic networks. In 4 pm New York Stock Exchange (NYSE) composite trading Friday, Nortel was up $2.50 at $80.8125, while Corning was up $8.125 at $283.75.

Corning has been aggressively expanding its components business, both through acquisitions and internal growth. The company figures it is in a unique position to become a leading provider, since it is already the world's leading producer of optical fibre. Indeed, Corning holds an estimated 40 per cent of the global market for fibre, or about twice that of its next closest competitor, Lucent. Corning believes it is uniquely positioned to design advanced fiber and components that work together to maximise carrying capacity as well as drive down the costs of the total package in fibre-optic systems.

Corning chairman and chief executive Roger G Ackerman has said he expects optical components to grow eventually into an even larger business for the company than fiber. That is a lofty goal - and one that will almost certainly require more big acquisitions. Corning doesn't break out revenue for its fibre business, but the company acknowledges that fibre accounts for the vast bulk of its telecommunications segment, which now makes up 70 per cent of revenue. Last year, Corning's revenue stood at $4.7 billion.

Corning's components business is expected to grow at least 80 per cent this year as the company spends heavily to expand its factories to meet soaring demand. The business is projected to account for about $1 billion of this year's expected revenue of nearly $7 billion.

If a deal occurs, it would be only the latest and greatest in a shopping spree aimed at bulking up Corning's optical equipment sector. During the last year, Corning acquired Oak Industries in a stock deal valued at about $1.8 billion and NetOptix for stock valued at $2.15 billion.

Nortel and Corning already work closely to ensure that Nortel receives components crucial to making its optical-transmission systems. The companies have described their relationship as a partnership, rather than simply customer and supplier. Earlier this year Nortel offered some of its engineers to help Corning find ways to deliver more optical amplifiers, which boost digital signals. Any deal that meshed Nortel's components operations with a competitor would help Nortel ensure that it has a dependable flow of parts, at a time when surging demand is making some of them hard for telecommunications equipment makers to obtain. Locking up a potential supplier may make Nortel's competitors cry foul, however, as it could make it harder for them to find parts.

Nortel's optical-system competitors include Lucent, France's Alcatel SA and Japan's Fujitsu Ltd, among others.

-- (The Wall Street Journal)