Business Transformation

Nokia/AlcaLu: The Key Friction Points

So Nokia and Alcatel-Lucent are officially at the M&A table, engaging in merger talks and plotting their future/survival. (See Nokia, Alcatel-Lucent in Merger Talks.)

It's a risky move. Both companies are the result of major mergers -- Alcatel with Lucent in 2006 and Nokia with Siemens Communications in 2007 -- and neither went well, with both companies coming close to following Nortel to the giant telecom vendor graveyard and having to restructure their businesses significantly to survive. (See Farewell, Lucent and The Decline & Fall of Nortel Networks.)

But the boards of both Nokia Corp. (NYSE: NOK) and Alcatel-Lucent (NYSE: ALU) appear to have decided that the bigger risk is to remain as they are, battling against market forces that are squeezing margins and making every quarter a tough one.

Having decided to sit at the negotiating table, the list of topics to be discussed -- financial terms, board structure, lunch menu and so on -- will be endless, but there are a few key topics of discussion that I think will be crucial to the negotiations and in terms of the impact on the wider market. Those topics are: staff morale; timing; wireless infrastructure; IP capabilities; professional services; and the management team. Oh and let's not forget the name of the merged company…

Let's look at them one by one.

Staff morale: Positive and convincing plans will be needed
The M&A activity that formed these two companies may have been almost a decade ago but the scars are still visible, so the prospect of another mega-merger is not likely to be greeted with much enthusiasm internally because of the potential upheaval and likely loss of jobs. Both companies need to communicate a strong and positive message to their teams that instills confidence that a merger, if it happens, would have more pros than cons. That's a tough task but one that needs to be addressed, as internal uncertainty and any blow to morale could affect business and be the catalyst for some unwelcome headhunting.

Timing: They need to move quickly
News of the talks will create uncertainty in the market, particularly at customers. Huawei Technologies Co. Ltd. , Ericsson AB (Nasdaq: ERIC) and others will immediately sense an opportunity to sow seeds of doubt and pitch themselves as the more stable supplier in the near, medium and long-term. The longer that inconclusive talks continue, the greater the threat to the current business that both Nokia and Alcatel-Lucent enjoy.

Wireless infrastructure: What stays and what goes?
The biggest portfolio question for a merged Nokia/Alcatel-Lucent surrounds the wireless infrastructure business line. Elsewhere there is minimal overlap, but mobile is a massive part of both vendors' businesses and propositions and a very clear and clinical decision would need to be made about which radio access network (RAN) products would be favored. Alcatel-Lucent in particular suffered very badly from having a confusing and multi-faceted 3G RAN portfolio for years, ending up with a combination of Alcatel, Lucent and Nortel-developed products: A repeat of that sort of mess would be disastrous. (See Alcatel Snags Nortel 3G Unit.)

IP capabilities: Good news for Nokia, bad news for Juniper
Alcatel-Lucent's IP business is the jewel in its crown and would become even stronger and more influential as part of a larger company with more customers. If the merger happens, the key impact would be on Juniper, currently Nokia's IP equipment partner, which has also been working with Nokia on cloud and virtualization developments. (See NSN, Juniper Strengthen Mobile Ties and Cisco Investments Gets $150M Boost.)

Professional services: Systems integration capabilities are key
Any large communications infrastructure vendor needs a large-scale professional services/systems integration components these days to be viable, especially as network operators figure out how to introduce virtualization capabilities and "white box" elements into their networks. Nokia has a very strong Global Services business that generated about 45% of Nokia Networks' revenues in 2014, while AlcaLu also has years of experience in its consulting and support services. Combined, that scale and experience, plus the growing SDN and NFV expertise in both companies (though particularly at AlcaLu, at its Nuage and Cloudband units) would make the combined company a formidable provider of professional services to all manner of communications service providers. (See Think Outside the White Box and NFV's Looming Battle: Systems Integration.)

Management team: Who makes the top table?
The most likely outcome at a combined Nokia/AlcaLu is that Rajeev Suri becomes CEO of the company and Michel Combes exits with the reputation of someone who saved Alcatel-Lucent with his Shift Plan and then delivered a return for shareholders that they could only have dreamed of two years ago (but would have been horrified at when Alcatel and Lucent merged). But what of the top table team? It would be absolutely vital to hang on to Basil Alwan from the AlcaLu team. But would Marc Rouanne lead the wireless infrastructure team? Would Marcus Weldon be retained as head of Bell Labs and group CTO? Those choices would make sense, in my view. But you can never tell who would actually want to stay and how personalities might gel or clash.

The new company name?
NokAlu. Better than AlcaNok. Suggestions on the message boards, please.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

COMMENTS Add Comment
Chriskel 4/16/2015 | 5:19:45 AM
Friction points - the name Since Nokia is currently NSN (as in Nokia Solutions & Networks), how does NSA sound? Considering the increased US focus that is likely, it could mean more govt. contracts (and less consumer interest!) ;-) 
MordyK 4/14/2015 | 6:05:17 PM
Re: And if talks break down... Seeing how they both experienced the downside of mergers, i'm sure they are taking that into account and have a plan to avoid that. As for teh French government, I'm sure they wouldnt even be at the table if they didnt have their blessing, as the market has changed drastically since their last intervention.
cnwedit 4/14/2015 | 10:26:13 AM
Re: And if talks break down... NokaLu definitely has a ring to it and it retains just enough of the history of the merged companies, but I'm guessing the Alcatel contingent won't go for being sandwiched in the middle. 

There also seems to be risk in going through a major consolidation process just as AlcaLu seemed to be recovering from its latest major overhaul.
[email protected] 4/14/2015 | 8:35:53 AM
And if talks break down... If the talks break down, both companies are exposed in multiple ways. They now need to make this happen otherwise customers will constantly be wondering what the next potentially disruptive M&A move might be.
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