Nokia and Alcatel-Lucent have confirmed they are in advanced talks about a "potential full combination" following the return of media speculation that Nokia has been negotiating a takeover of Alcatel-Lucent's wireless equipment business.
In a statement, the two players said any merger would take the form of a public exchange offer by Nokia Corp. (NYSE: NOK) for Alcatel-Lucent (NYSE: ALU) and that a further announcement would be made when appropriate.
"There can be no certainty at this stage that these discussions will result in any agreement or transaction," noted the companies in their statement.
Rumors of such a combination have surfaced before, but this is the first time that any official statement has been forthcoming. (See Eurobites: Alcatel-Lucent's Shares Rise on Nokia Bid Rumor from May 2014.)
A full merger between Nokia and Alcatel-Lucent would create a company generating nearly €26 billion (US$27.4 billion) in annual revenues, based on 2014 results that saw both companies report revenues at around the €13 billion ($13.7 billion) mark. That sort of scale would give the merged company -- NokAlu? -- the scale to compete with communications networking behemoths Ericsson AB (Nasdaq: ERIC) and Huawei Technologies Co. Ltd.
Last year, Swedish equipment giant Ericsson generated revenues of $25.8 billion, while China's Huawei reported sales of $46.5 billion, with much of its growth coming from its newer smartphones business. (See Ericsson Feels US Capex Squeeze in Q4 and Huawei Profits Soar on 4G, Smartphone Sales.)
Alcatel-Lucent's share price was trading up 10% to €4.25 in Paris Tuesday morning following confirmation of talks, giving it a market valuation of €12 billion ($12.7 billion). Nokia's share price, meanwhile, dipped by 6.5% to €7.27 on the Helsinki exchange.
Nokia CEO Rajeev Suri has previously talked about the likelihood of consolidation in the equipment market as competition from China continues to squeeze traditional Western players. Alcatel-Lucent's CEO Michel Combes has been more bullish about surviving without needing to broker a merger deal. (See Alcatel-Lucent CEO: We Can Go It Alone.)
Alcatel-Lucent and Nokia have struggled following previous rounds of consolidation and restructuring, although there have recently been encouraging signs for both companies.
Reporting 2014 results, Alcatel-Lucent flagged an improvement in margins, thanks to cost-cutting efforts, as well as a 6% increase in revenues from its IP routing business, which has become integral to the company's recovery and now accounts for nearly one fifth of total sales. Revenues also rose by 4% at the wireless access business, which generates more than one third of sales. (See Alcatel-Lucent Reports Marginal Progress.)
Despite that, overall revenues dipped by 3% following declines in several other business areas, including a 16% drop in sales of IP platform products.
Meanwhile, Nokia saw revenues at its main networks business fall by 1% in 2014 but cited an 8% improvement in the last three months of the year (compared with the same part of 2013) and success in the large North American market following recent deals with Sprint Corp. (NYSE: S), the country's third-biggest mobile operator. (See Nokia Ends 2014 on a High.)
Nokia has undoubtedly been attracted to Alcatel-Lucent's IP prowess, its strength in the North American market and well as its growing reputation in the field of SDN and NFV -- technologies that look set to have a profound impact on the way service providers manage their businesses.
But there are many hurdles to overcome before a deal could be struck. The deal could face opposition from the French government, which has appeared resistant to mergers and acquisitions affecting large national companies.
Given the organizational difficulties that plagued the merger between Alcatel and Lucent, there might also be concern that another tie-up between equipment-making giants would face similar problems.
Confirmation that Nokia and Alcatel-Lucent are in talks came days after the Finnish player was reported to be seeking a buyer for its HERE location-based services unit so that it could better focus on its core networks business. Uber, the developer of the famous taxi-hailing app, was reported to be among the list of potential HERE buyers. (See Eurobites: Ericsson Takes 5G on the Buses.)
— Iain Morris, , News Editor, Light Reading