Nokia Corp. is intensifying efforts to transform the company’s operations with an agreement to acquire French-American telecom equipment maker Alcatel-Lucent SA for about $16.6 billion. The deal is in continuation of a reorganization exercise that culminated almost one year ago in the sale of the Finnish company’s mobile handset division to Microsoft Corp. for $7.2 billion.
The agreement with Alcatel-Lucent positions Nokia as a leading player in the highly competitive market for wireless network equipment, a sector valued annually at about 130 billion euro ($138 billion) and projected to expand at an annual compounded growth rate (CAGR) of 3.5 percent from 2014 to 2019, according to Nokia. The company added the transaction expands its addressable market by up to 50 percent and said it sees cost savings of up to 900 million euro in 2019 and up to 200 million euro in interest expense reductions by 2017.
With this transaction Nokia continues efforts to transform its operations and improve revenue and profit growth by diversifying into less commodity oriented segments of the wireless communications equipment market. After exiting the mobile handset business with the sale of its cellphone division to Microsoft, Nokia has refocused operations on the market for networking equipment sold to telecom service providers thereby reducing its exposure to fluctuations in the consumer electronics sector. The combination with Alcatel-Lucent will give the company additional opportunities to continue growing in a less margin-sensitive segment of the industry, according to Rajeev Suri, president and CEO of Nokia.
“Together, we expect to have the scale to lead in every area in which we choose to compete, drive profitable growth, meet the needs of global customers, develop new technologies, build on our successful intellectual property licensing, and create value for our shareholders,” Suri said in a statement announcing the transaction.
For Alcatel-Lucent, the decision to combine operations with Nokia is very likely a defensive move by the French company to stem losses and protect market share. The company’s sales have been under pressure for years, falling to 13.2 billion euro in 2014 from as high as 15.3 billion euro in 2011. It continues to lose money annually; it last reported profits in 2011 and its market value has taken a beating as a result. In 2006, Alcatel agreed to acquire North American rival Lucent Technologies for $13.4 billion but that transaction has not produced the expected returns for the combined company.
Alcatel-Lucent executives believe the sale of the business to Nokia will help them defend their market position globally and especially in Europe where the company generates a chunk of its sales and competes aggressively with Sweden’s Ericsson. Additionally, the combination with Nokia would help the company compete better in other parts of the globe while reducing total operating costs and moving them to profitability.
Will this union be enough to save the two companies? They’ll be fine in Europe and North America where governments concerned about the safety of their communications systems are closing bids to Chinese companies like Huawei. In other parts of the globe, though, competition in the wireless communication equipment market is as intense as in the handset business.
Rivals in the sector include China’s Huawei, Samsung Electronics and Ericsson AB. The combined Nokia-Alcatel-Lucent enterprise is likely to maintain a dominant market share in North America and in Europe, in addition to its strong presence in China, according to company executives.
“A combination of Nokia and Alcatel-Lucent will offer a unique opportunity to create a European champion and global leader in ultra-broadband, IP networking and cloud applications. I am proud that the joined forces of Nokia and Alcatel-Lucent are ready to accelerate our strategic vision, giving us the financial strength and critical scale needed to achieve our transformation and invest in and develop the next generation of network technology,” said Michel Combes, CEO of Alcatel-Lucent in the statement referenced above.
“This transaction comes at the right time to strengthen the European technology industry. We believe our customers will benefit from our improved innovation capability and incomparable R&D engine under the Bell Labs brand. The global scale and footprint of the new company will reinforce its presence in the United States and China,” Combes added.