December 5, 2015    4 minute read

An acquisition to remember: Nokia & Alcatel-Lucent

   December 5, 2015    4 minute read

An acquisition to remember: Nokia & Alcatel-Lucent

Looking back at M&A activities throughout 2015 reveals what a busy year it has been. According to Thomson Reuters, companies all over the world have spent around $4.2 billion on acquisitions alone this year. Many also claim that 2015 has been the best year for M&A since the global financial crisis, especially for the U.S. and some European countries. A few notable M&A deals closed this year are: the merger of Pfizer and Allergan, the Charter-Time Warner deal and the Heinz-Kraft merger.

Details of the acquisition

Further fueling the M&A market is the pending acquisition of Alcatel-Lucent by Nokia, due for completion in the first half of 2016. Nokia is a Finnish communications and information technology company, currently the world’s third-largest telecom network equipment maker. Alcatel-Lucent on the other hand, is another giant in the telecom equipment industry – it offers products in IP and cloud networking and is one of the strongest players in the U.S. wireless equipment market.

The planned acquisition is expected to form a new combined company with four business groups: mobile networks, fixed networks, applications and analytics, and IP or optical networks. However, Nokia Technologies and Alcatel-Lucent Submarine Networks will remain separate entities. Nokia’s shareholders will hold 66.5% of the stakes in the combined company while Alcatel-Lucent’s shareholders will hold the remaining 33.5%. Since the deal is structured as a takeover instead of a merger-of-equals, the new leadership team will mainly consist of members from Nokia.

The deal has been progressing pretty well so far: By September 2015, Nokia had obtained the necessary regulatory approvals from major governments pertaining to the deal, and just a few days back, Nokia was shown the green light by its shareholders to proceed with the acquisition. The only piece of the puzzle remaining is to have all Alcatel-Lucent shareholders tender in their holdings of the company.

Expected benefits

When the smartphone technology flourished, Nokia was left behind by its competitors and ended up selling its handset business to Microsoft to help recover its losses. Since then, Nokia has adapted a new strategy of focusing on the manufacturing of telecom equipment. The planned $17.6 billion acquisition of Alcatel-Lucent is a major part of this new strategy. After its completion, Nokia Corporation will be the 2nd largest mobile equipment manufacturer in the world after Ericsson. Even Mr Rajeev Suri, the CEO of Nokia has said that the aim of the acquisition is for the company to achieve a better standing in the market. With a larger presence, the combined company is likely to enjoy better economies of scale, resulting in lower average costs.

Analysts believe that the complementary expertise of both individual companies (Nokia in wireless networks and Alcatel-Lucent in routers and broadband networks equipment) will also benefit the combined company by increasing efficiency and expanding product ranges. This acquisition will also enable Nokia Corporation to innovate extensively in the development of 5G networks as Alcatel-Lucent has already spent billions of euros on research and development in the industry.

Possible pitfalls

The benefits of the acquisition are undoubtedly many, but possible pitfalls are abundant as well. Strong competition in the industry and weakening demand from telecom carriers in Japan, Europe and North America remain a concern as these factors may offset the benefits of the acquisition. According to Bengt Nordstrom (co-founder of Northstream, a telecom consulting firm), the acquisition is fine but

“the real challenge is where are they going to find growth.”

Another possible pitfall is in the terms of potential cultural clash and managerial problems. Both companies have had bad experiences in M&A: Alcatel’s merger with Lucent Technologies resulted in corporate disagreements and faltering sales while Nokia’s failed merger with Siemens ended with Nokia buying out the latter in 2013. Some argue that it is highly possible that identical issues may arise post the completion of this deal.

In a nutshell…

It is undeniable that if completed, the acquisition of Alcatel-Lucent by Nokia is going to be historic in the industry of telecommunications. But whether this acquisition is remembered for its success or failure depends on the demand in the industry and how well both companies complement each other in terms of products, goals and identity.

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