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Nokia's Suri Defends AlcaLu Deal Against Critics

Iain Morris
4/30/2015

Nokia CEO Rajeev Suri has raced to the defense of his €15.6 billion (US$17.4 billion) all-stock bid for rival Alcatel-Lucent amid lingering concern about the strategic rationale for the deal and the difficulties of pulling it off. (See Nokia/AlcaLu: The Key Friction Points and Nokia + AlcaLu: What the Analysts Say.)

Speaking to analysts several hours after Nokia Corp. (NYSE: NOK) had published disappointing results for the January-to-March quarter, Suri claimed that every single customer he has spoken to since the deal was announced has expressed support for the move. (See Nokia Slumps on Networks Malaise.)

"They see it as a way to ensure there are three strong global competitors and not as a reduction in competition," he said. "They see it as a way to protect investments of the past while enabling the innovation of the future."

Suri also sought to address the worry that another merger between two huge equipment makers could run into the same problems as earlier tie-ups.

The merger between France's Alcatel and New Jersey-based Lucent suffered years of losses as the two organizations struggled to reconcile their different cultural and technological backgrounds. Nokia's joint networks venture with Germany's Siemens AG (NYSE: SI; Frankfurt: SIE), which has now given way to Nokia Networks, also failed to live up to its original billing.

Acknowledging that concerns about "execution risks" were understandable, Suri said there were good reasons to expect a happier ending from this latest deal.

"It's not a joint venture but an acquisition and there is clarity in terms of leadership and governance," he said. "Both the companies have learned from recent transformation and restructuring, and so we can ensure that history does not repeat itself."

Nokia says it has already appointed an "integration leader" to ensure that integration planning is kept separate from ordinary day-to-day business activities.

Suri also believes that recent technology shifts will aid the merger process. "We've been transitioning away from customized hardware and towards open interfaces that can mitigate the pain of expensive swaps," he said.


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Nevertheless, some industry watchers were alarmed when Nokia assured the French government it would not cut jobs in France, where Alcatel-Lucent (NYSE: ALU) maintains its headquarters, for two years after the deal closes. Others fear that regulators in other parts of the world could stymie the move.

Suri insisted the commitments Nokia has given the French government are "manageable within the business case of the transaction" and that initial conversations with government officials in various countries have been "positive."

After flagging a weak performance at the main networks business during the first three months of the year, executives were challenged during the earnings call about their forecast that a merger will deliver €900 million ($1 billion) in operating cost synergies, with RBC Capital Markets suggesting this target might hamper Nokia's market share ambitions.

"We are confident we can execute as discussed and expect no change in planned cost reductions from the transaction," said Timo Ihamuotila, Nokia's CFO.

Earlier today, the Finnish company revealed that operating profits at its networks business had fallen by 61% in the first quarter, compared with the same period of 2014, and that its operating margin had shriveled to 3.2% from 9.3% in the year-earlier period.

The company's share price has fallen by more than 9% on the Helsinki stock exchange today.

Suri's defense of Nokia's bid for Alcatel-Lucent came just a day after Odey Asset Management, the French company's second-biggest shareholder, was reported by the Financial Times (subscription required) to have described the deal as "unacceptable."

The investment group, which owns around 5% of Alcatel-Lucent's stock, is said to have complained that Nokia's bid massively undervalues Alcatel-Lucent and is really a merger "dressed up as a takeover."

Last week, ratings agency Fitch Ratings Ltd. weighed in with its own downbeat assessment of the deal, arguing it would do little to ease competition.

"Other major vendors will use the time it takes for the deal to complete to try and strengthen their own position," said Fitch in a published statement. "In some markets, such as the US, competition should ease in the longer term, but in others the picture is less clear."

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

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