Why the Nokia, Alcatel-Lucent mega-merger is significant: Page 2 of 2

Analysts weigh in

Overall, the deal has spawned mixed views with some analysts lauding it, and others, including a former employee, warning that it may be risky move for Nokia.
 
The plus points for Nokia are in three areas.
 
The first is market share. Various estimates put the combination of Nokia’s and Alcatel-Lucent’s telco equipment market share just slightly ahead of Huawei, making the new entity the No 2 vendor behind Ericsson, which is currently the leader.
 
This augers well for Nokia, as it will immediately gain scale to compete with Ericsson and Huawei, particularly in the United States and China, where Alcatel-Lucent had recent wins in 3G (Third Generation) and Long-Term Evolution (LTE) contracts.
 
Next, the two companies have been cutting costs quite aggressively, something that could benefit the combined entity once it works out how best to use its human and financial resources.
 
But perhaps most significantly, Nokia’s move to acquire Alcatel-Lucent has more affinity and strategic direction than it did when it merged with Siemens.
 
In a research note, Ovum’s Mark Newman said that when one considers the strengths and weaknesses of Nokia and Alcatel-Lucent and their product portfolios, a merger of the two businesses seems logical.
 
The chief research officer of the London-based research firm said that Nokia is a mobile-only equipment vendor, while Alcatel-Lucent’s strengths are in the fixed network business, especially in core and optical network, as well as IP (Internet Protocol) routing.
 
“It [Alcatel-Lucent] has long struggled in the wireless business, and its attempts to become a leading player in LTE have failed,” Newman said.
 
“Alcatel-Lucent has also been active in SDN/ NFV with CloudBand and Nuage, and aggressive with small cells – areas in which Nokia is perceived to be lagging behind the competition,” he added.
 
Two financial institutions quoted by CNBC gave the deal the thumbs-up, with Citigroup Inc saying that it believed that “Alcatel-Lucent's and Nokia's wireless businesses are a great strategic fit since the latter is as strong in the United States as NSN was in Europe and Japan [at one time], and that both have strong positions in China.”
 
Credit Suisse Group in a research note said, “We believe that such a potential deal would allow Nokia to significantly improve its presence in the United States with AT&T and Verizon, where Ericsson and Alcatel-Lucent are key suppliers.”
 
Nordnet brokerage strategist Jukka Oksaharju said that Nokia’s Rajeev has a good track record in corporate turnarounds, including what he did earlier with NSN.
 
“There is no reason to doubt that this deal too wouldn’t increase shareholder value ... . We know that there are risks related to France and the cost cuts, but I believe that Nokia has calculated a margin of safety to the deal price,” Oksaharju told Reuters.
 
Other challenges
 
Still, Ovum’s Newman (pic) warned that there are still very real risks associated with such a move, as a full merger would plunge both businesses back into a period of introspection and restructuring.
 
Moreover, rationalising two product lines would be difficult, and such moves could create significant duplication in areas such as mobile broadband and small cells.
 
Also a challenge would be maintaining two different product portfolios and servicing existing customers, which could counteract the benefits of increased scale, he added.
 
Other detractors of the deal include Juha-Pekka Helminen, Nokia’s former strategy director, whom the Financial Times quoted as saying on Twitter that “Doing merger with Alcatel [is] crazy … Alcatel-Lucent is and will be a mess [plus the] French government.”
 
Mathias Lundberg, an equity analyst at Swedbank, told MarketWatch that while the bid on Alcatel-Lucent is strategically correct in the long term, it is still highly risky.
 
“We are hesitant [about] its potential for value creation; the true picture will only emerge in a couple of years ... . If Nokia succeeds in this endeavour, a really strong actor will emerge.
 
“However ... many similar ventures have resulted in less stellar performance. Having recently been in a turnaround, perhaps the Nokia team can do a better execution than history would suggest.”
 
Meanwhile, UBS analyst Gareth Jenkins said that other than political and regulatory issues, he believed the two biggest risks to deal with in the execution (not completion) are the cultural difficulties of combining a Finnish-German-French-US corporate entity.
 
“Strong management will be required, and fortunately there are plenty of high-quality managers across the businesses to choose from.”
 
Newman added, “For both Nokia and Alcatel-Lucent, the big challenge facing their businesses is the shift in value from hardware to software, and the convergence of IT and telecoms technology.
 
“Both companies are still firmly anchored in network hardware. A merger of the two businesses will give them more scale but it will not create the software culture to compete in the IT-centric future.”
 
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