Market Woes Drag Vendors Down

Merger misgivings
Mergers, of course, are often conceived as a way of easing competition, but not everyone is convinced a tie-up between Nokia and Alcatel-Lucent will have the desired effect.

Ratings agency Fitch Ratings Ltd. is one commentator that has questioned the merits of the deal on this basis. "In a global industry such as telecom equipment, we believe a vendor with the scale and presence to match the market leaders could introduce further competitive intensity in what has always been a price-sensitive market," it said in a statement published last week.

In addition, the diversification provided by HERE, Nokia's mapping division, may be cold comfort given Nokia's apparent interest in selling this business. Nokia Technologies, which looks after intellectual property rights, had a strong quarter but seems heavily reliant on Microsoft Corp. (Nasdaq: MSFT) following Nokia's sale of its devices business to the software giant in April last year. During the earnings call, Ihamuotila was asked how Technologies would be affected by the disappearance of one of its smartphone licensees, but squirmed out of providing a clear answer. (See Nokia Makes €15.6B Bid for Alcatel-Lucent and Nokia Puts HERE Up for Sale.)

Alcatel-Lucent's forthcoming earnings announcement -- scheduled for May 7 -- may be an awkward experience for Nokia. Should its rival and takeover target report a stronger set of results than either Nokia or Ericsson, there could be further rumblings of discontent from investors. Odey Asset Management, Alcatel-Lucent's second-biggest shareholder, was earlier this week reported to have described Nokia's €15.6 billion ($17.6 billion) all-stock offer as "unacceptable," arguing that it massively undervalues the French player. Because there is no cash component to the bid, the recent fall in Nokia's share price will have made it seem like an even worse deal from Odey's perspective.

Despite efficiency improvements and success at parts of its IP core-networks business, Alcatel-Lucent has continued to struggle, reporting a 6% year-on-year fall in revenues in the October-to-December 2014 quarter. With 40% of its revenues coming from North America, it remains heavily exposed to the slowdown that Ericsson complained about in that market. Having also boasted of 4G wins in China earlier this year, it may feel a similar impact to Nokia of entry deals with Chinese operators. (See Alcatel-Lucent Reports Marginal Progress and AlcaLu Lands 'Top 3' 4G Deal at China Telecom.)

Should Alcatel-Lucent disappoint, shares in Nokia could take a further hit (as, indeed, might Ericsson's). As a number of critics have cruelly noted, an alliance between two losers is unlikely to produce a winner. That certainly appears to be an overly harsh assessment of Nokia and Alcatel-Lucent, but it is not entirely unfounded. Suri was at great pains to defend his takeover move during yesterday's earnings call. He may have more convincing to do in the months ahead. (See Nokia's Suri Defends AlcaLu Deal Against Critics.)

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

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