Telecom equipment vendors as a group are sorely under-leveraged, Merrill Lynch analyst Tal Liani wrote in a report issued today, and many of them would do well to take on more debt.

On average, telecom equipment vendors carry an average debt-to-equity ratio of 21%, while the average ratio for companies in the Standard & Poor’s 500 is 200%, Liani wrote. If equipment vendors took on enough debt to match those in the S&P 500, they could increase shareholder value by an average of 20%, he wrote.

Vendors could increase shareholder value by either using new debt to buy back stock or by buying back all outstanding employee stock options and using the remaining funds to buy back stock, Liani suggested.

In particular, Motorola--with its healthy cash flow, large net cash reserves and low valuation--could boost shareholder value by 85% that way, he wrote. Adtran and Avaya could see increases of 58% and 34%, respectively. And Cisco Systems could grow its value 8% to 22%, depending on which of the above two methods it followed.

Of course, taking on more debt is not the right move for every vendor. For example, Nortel Networks, Openwave, Ciena and Extreme Networks already have higher debt-to-equity ratios than the average S&P 500 company. Juniper would not be able to add value by adding debt, according to Liani’s calculations, and Qualcomm would actually dilute shareholder value by doing so.

In addition, given the evolution of many new technologies as well as the current consolidation trend, vendors might want to conserve cash to invest in research and development as well as mergers and acquisitions rather than using it to purchase more debt. Vendors are tasked with finding the right balance of cash and debt for their particular circumstance. For example, optical equipment vendor Sycamore Networks hoarded nearly $1 billion in cash while it reviewed strategic alternatives for nearly two years.