How Do Nokia & Alcatel-Lucent Stack Up?

Nokia has confirmed it is in talks to acquire Alcatel-Lucent, but how do the two companies compare in terms of their assets, organizational structure and key performance indicators? (See Nokia, Alcatel-Lucent in Merger Talks, Nokia/AlcaLu: The Key Friction Points and Finnish Line for AlcaLu?)

In terms of revenues, each generated about €13 billion (US$13.8 billion) in 2014, with the bulk of revenues in both cases coming from the sale of networking products, despite media interest in Nokia Corp. (NYSE: NOK)'s HERE mapping division (which is rumored to be up for sale) as well as Nokia Technologies -- the part of the company responsible for intellectual property rights. (See Eurobites: Ericsson Takes 5G on the Buses.)

Nokia, however, has built its networks business around mobile broadband technologies, and claimed to be the world's third-biggest vendor in this market, behind Huawei Technologies Co. Ltd. and Ericsson AB (Nasdaq: ERIC), last year. It attributed its sales success in the October-to-December quarter mainly to growing adoption of LTE radio products. At the end of the year, Nokia was serving about 162 LTE operators besides an installed base of 200 3G customers and 300 2G customers.

Table 1: Nokia 2014 Financials at a Glance (€M)

2014 Year-on-Year Change Compared With 2013
Revenues 12,732 0%
- Networks 11,198 -1%
- HERE 969 6%
- Technologies 578 9%
Gross margin 44.3% +2.1 percentage points
Operating profit 170 -67%
Net profit 1,171 2756%
Employees 61,656 12%
Source: Nokia

Professional services have also become a critical part of Nokia's networks operation. The Global Services division, which manages networks serving around 550 million customers, generated about €5.1 billion ($5.4 billion) of the €11.2 billion ($11.9 billion) that Nokia Networks reported in revenues in 2014.

Even so, as noted by Caroline Chappell, Principal Analyst, Cloud and NFV, at Heavy Reading , Nokia has been trying to ensure that products such as NetAct -- a virtualized solution for network management -- can appeal to fixed network players. A merger with Alcatel-Lucent (NYSE: ALU), which makes 16% of its revenues from the fixed access market, would clearly support that ambition.

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The big attraction of Alcatel-Lucent, though, may be its IP core networking and IP software lines of business, which have been responsible for market-leading hardware and software products such as the vendor's router portfolio, the CloudBand NFV management platform and the Motive device management tools: That division accounted for as much as 45% of revenues last year. Alcatel-Lucent is determined to sell these products to both fixed and mobile operators, and a sale of its wireless business to Nokia would have undermined that strategy, notes Chappell. A full-blown merger, on the other hand, would support Alcatel-Lucent's ambitions just as much as Nokia's.

Table 2: Alcatel-Lucent 2014 Financials at a Glance (€M)

2014 Year-on-Year Change Compared With 2013
Revenues 13,178 -3%
- IP routing 2,368 6%
- IP transport 2,114 0%
- IP platforms 1,484 -16%
- wireless access 4,685 4%
- fixed access 2,048 -1%
- managed services 369 -53%
- licensing 55 -29%
Gross margin 33.4% +2.1 percentage points
Operating profit 623 124%
Net profit -86 Vast improvement!
Employees 52,673 -11%
Source: Alcatel-Lucent

Clearly, a takeover of Alcatel-Lucent could see Nokia dump Juniper Networks Inc. (NYSE: JNPR) as its IP partner, giving the Finnish vendor a strong IP presence in several areas. Alcatel-Lucent controlled 26% of the IP edge routing market at the end of September 2014, according to market-research player Dell'Oro. Motive, which is used to support fixed and mobile device management, was managing around 300 million devices at the end of 2014, making it the market-leading product in this area, according to Analysys Mason, another market research company. (See Nokia/AlcaLu: The Key Friction Points.)

Moreover, while Alcatel-Lucent and Nokia generated comparable revenues in Europe and some other parts of the world, Alcatel-Lucent is a much bigger player in North America, while Nokia does more business in the Asia-Pacific. Bulking up in these respective regions would help a combined company stand up to the likes of Ericsson and Huawei.

Table 3: Nokia Networks' 2014 Sales by Region (€M)

2014 Year-on-Year Change Compared With 2013
Europe 2,929 -4%
Middle East and Africa 1,053 -5%
Greater China 1,380 16%
Asia Pacific 3,289 -2%
North America 1,538 15%
Latin America 1,009 -20%
Source: Nokia

Table 4: Alcatel-Lucent's 2014 Sales by Region (€M)

2014 Year-on-Year Change Compared With 2013
North America 5,793 -6%
Europe 2,982 -10%
Asia Pacific 2,631 15%
Rest of world 1,772 -4%
Source: Alcatel-Lucent

From a purely operational perspective, Nokia looks far more profitable than Alcatel-Lucent at the gross-margin level, although both companies flagged gross-margin improvements last year. Unlike Nokia, Alcatel-Lucent failed to register a net profit in 2014, but its bottom line rebounded after a dismal 2013 -- when net losses ran to €1.25 billion ($1.3 billion) -- and it is clearly moving in the right direction.

What a tie-up would mean for employee numbers remains to be seen, but if the two players were brought together in their current form the resulting entity would have more than 114,000 employees. That would still make it smaller than Ericsson, which had 118,000 staff on its books at the end of 2014, when it made about the same in revenues as Alcatel-Lucent and Nokia combined.

However, while Nokia's employee base grew by 12% in 2014, Alcatel-Lucent's shrank by a similar proportion. Downsizing and efficiency are likely to be the watchwords post-merger, as investors scour financials for evidence of synergies the deal has brought.

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

rauf.sulya 4/15/2015 | 3:55:07 AM
Re: Getting it right http://in.reuters.com/article/2015/04/15/nokia-alcatel-lucent-m-a-idINKBN0N60CP20150415
R Clark 4/14/2015 | 8:46:46 PM
Getting it right It's high risk but both parties have probably decided the risks are higher if they don't do it, especially now the news is out.

THe hard thing is to make it work, but there are so many people on both sides who've experienced the worst of mergers that they may actually have an idea about how to do it right.

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