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Business Transformation

Nokia, Alcatel-Lucent in Merger Talks

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.


Want to know more about the emerging SDN market? Check out our dedicated SDN content channel here on Light Reading.


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, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

kq4ym 4/15/2015 | 6:00:48 PM
Re: Ramifications With French government opposition maybe this one won't fly. I do wonder how much truth is in the statement "... the likelihood of consolidation in the equipment market as competition from China continues to squeeze traditional Western players." If there really is a squeeze one might wonder why French authorities are resistant to large mergers.
Mitch Wagner 4/14/2015 | 5:22:16 PM
French influence The French government can make or break the deal. They love Alcatel-Lucent (and Alcatel before it), as "the champion of the country's telecom sector," according to The New York Times.

But the biggest part of AlcLu's revenue is based on the legacuy Lucent business in Murray Hill, N.J., which contributed almost 44% of 2014 annual revenue of €13.2 billion. Europe was about 22 percent, and Asia just under 20 percent.

Also, for my fellow history buffs:

Alcatel and Lucent were each products of more than a century of industry consolidation. Alcatel's forerunner, Compagnie Générale d'Electricité, was formed in 1898 by a French engineer named Pierre Azaria, evolving over the years into France's largest telecom company. Lucent Technologies, which included the Bell Labs, was created from the breakup in the 1980s of the former telephone monopoly AT&T. It was spun off as a separate company by AT&T in 1996.

And Nokia was founded in 1865 as a wood pulp producer.
gin-drinker 4/14/2015 | 12:48:40 PM
Does anyone think this is a good idea? Other than Nokia or ALU's competition?

 

Scenario 1.  The acquisition takes a long time becuase of government meddling and general complexity, and this causes erosion in customer confidence during a period of uncertainty.  The benficiaries are the competition.

 

Scenario 2.  The acquisition happens, but involves only wireless part of ALU.  This has two consequences.  First, since it was the wireless solution that Alctel used to win the Verizon deal at the start of 2014, does that mean that this decision might be re-evaluated if wireless infrastructure is no longer part of ALU's offering?

Second, the wireless unit is profitable, and makes the remainder of ALU look even worse.  How much liability can ALU dump along with the wireless unit?  It now makes the Timetra group pretty much driving revenue growth for the entire remaining ALU.

Result: the competition benefits from a weakened ALU.

 

Scenario 3.  The acquisition involves the whole of ALU, and executes in reasonable time.  At that point the chaos kicks in - just as we saw when Alcatel bought Lucent, when Ciena bought Nortel, when Marlin bought NSN and Tellabs, and so many other large acquisitions.

Oddly enough, economies of scale never materialize, and company value is quickly eroded.

 

The competition benefit hugely as they pick up customers.  In contrast the new Nokia-Alcatel-Lucent company does not gain any new customers and quickly loses market share.

 

Just my 2 cents.

 

 
Ariella 4/14/2015 | 9:12:12 AM
Re: Ramifications It sounds like the odds are against the merger getting off the ground at all. But onlyh time will tell.
sowen557 4/14/2015 | 7:06:40 AM
Re: Ramifications Two wrongs dont make a right.  These guys are no where in major RFPs in the Mobile Space anymore.
iainmorris 4/14/2015 | 5:18:55 AM
Ramifications This would obviously have major ramifications for partnerships the companies have with other players and potentially relieve some pricing competition in the market -- unlikely to be welcomed by service providers.
[email protected] 4/14/2015 | 5:18:55 AM
Watch out for Ericsson, Huawei The fallout from a combination of Nokia and Alcatel-Lucent is enormous -- the key thing for these two companies now is to move as fast as possible because Ericsson and Huawei are going to swoop on their business in an effort to capitalize on the period of uncertainty.
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