Nokia, Alca-Lu merger not as sweet as it seems
As Nokia's sale of its handset business draws closer, the markets are increasingly determined that it will spend its €5.44 billion ($7.51 billion) windfall on bolstering its chief remaining business by acquiring Alcatel-Lucent's wireless infrastructure unit for an anticipated €2 billion.
The fit seems neat on paper – Nokia will have a record cash mountain of about €14 billion after its handset deal with Microsoft is completed; it has said before that it needs a partner to increase the scale of NSN, which will be its main business post-transaction; ALU's new CEO Michel Combes is a renowned slasher and burner and wants to make more radical divestments than his predecessor; Combes effectively demoted the pure wireless business during his recent reorganization, putting IP systems, and especially the core and edge routers, at the heart of the strategy.
All this logic seems overwhelming, so analysts are ignoring all the lessons of history – both companies' disastrously mismanaged mergers in the last decade; the challenges of converging their two product lines and the distraction that would create from competing with Ericsson and Huawei; all those “tying two rocks together won't make them float” warnings. Bloomberg points out that, once Nokia sells the device business, it will have the eighth largest cash pile in Europe among non-finance companies. The danger is that the Finnish firm will behave like a lottery winner, spending its new-found riches without due thought.
Not everyone takes this line though. “This deal makes complete sense,” Sami Sarkamies of Nordea Bank told Bloomberg. “Nokia will have the financial flexibility to do this kind of deal and Alcatel needs to slim down. There is a relatively high likelihood of this deal happening.” He also believes Nokia must move quickly in case Samsung decides to bid for ALU's wireless assets, though the Korean firm, which is building up its infrastructure activities, denied interest.
Insiders say Nokia is seriously evaluating the ALU option and even that preliminary talks may have taken place. The price it would have to pay would be between €1 billion and €2 billion, according to various estimates, and might enable Nokia to resume dividends payment – as much as 40 cents a share, says one observer.
If the companies were to merge, Nokia would gain an additional €3.4 billion in annual sales, excluding services and software, and would have about 32% market share, overtaking Huawei, on about 22% of the global wireless infrastructure space, and getting close to Ericsson‟s 36%. The deal would also bring NSN a better base in the US, where ALU is supplying the top three carriers, but NSN has only gained business with T-Mobile. Verizon, Sprint and AT&T account for about 35% of ALU's revenue while TMo contributes about 4% of NSN's.
However, the combined entity would have to compete as a pure-play wireless vendor at a time when top tier carriers are looking to invest in converged wireless/wireline networks. Of course, the enlarged Nokia might arrange a strategic alliance with the rump of ALU, which is growing its base in carrier IP networking, but this would be a less harmonized platform than Huawei, in particular, offers.
Of course, official spokespeople for both firms remain silent on the matter, and ALU representative Simon Poulter said: “Alcatel-Lucent's focus is on executing the Shift Plan as the means of managing our own destiny”, referring to Combes' major reorganization of the firm around con-verged IP networking.
Combes has said: “We are going to focus on the areas where we can be one of the top three players in the world. Otherwise, it's not worth it.” It remains to be seen whether he identifies mobile networks as an area where the firm can vie with the big three on its own merits – or, if not, whether LTE technology will still be essential to being a top three player in carrier IP systems overall.
Nokia had €9.1 billion in cash and equivalents as of June 30 and will add €5.44 billion from Microsoft. It currently has a junk credit rating and €5.4 billion in total debt. CFO Timo Ihamuotila said last month that, had the Microsoft and Siemens transactions closed before the end of the second quarter, the company would have had gross cash of €14.9bn. Nokia failed to pay a dividend this year for the first time for at least 143 years. Though NSN'‟s ongoing restructuring is less radical than ALU's, Nokia is evaluating the businesses that will remain post-handsets (NSN, Maps and IPR), and will then return excess cash to shareholders, the CFO said.