Nokia buys Alcatel Lucent for €15.6 billion, overtakes Huawei

The deal announced today will need to be approved by Nokia’s shareholders, take account of work council consultations and pass regulatory approval around the world before completion, which is expected in the first half of next year. A combined company in 2014 would have been in second position in the overall network market (see Figure); however my experience suggests future revenues will be less than the addition of the 2 – as a rule ‘1+1<2’ in merger activities. If merged in 2014 the company would have had around 125k staff and revenues of €36.4B (split roughly equally) and net profits of €4.0B (skewed towards Nokia).

I thought you’d like to think about the implications for both companies and customers.

Nokia has been through significant restructuring in the last couple of years, renaming ‘Nokia Siemens Networks’ as ‘Nokia Solutions and Networks’ when it bought out Siemens from the 50:50 partnership in 2013; a significant move considering the sale of its faltering mobile phone business to Microsoft at the same time.

Alcatel bought the American supplier Lucent in 2006 – remaining a French company in the process. It launched the 3-year ‘Shift Plan’ in 2013 to reorganise and restructure the organisation. It included staff reductions in 2015 of 4.1k in EMEA, 3.8k in Asia Pacific and 2.1k in the Americas – 10k in total.

Today’s announcement will create another European giant along side Ericsson in the Service Provider Network space and help to combat the global rise of the Chinese suppliers Huawei and ZTE.

The combined resources of the new Nokia will include:

• 40k employees with an annual spend of €4.7 billion in research and development including Alcatel Lucent’s bell Labs, Nokia’s FutureWorks and Technologies divisions
• A complimentary set of products including fixed and mobile broadband, IP routing, core networks, cloud applications and services.

The intention is to form ‘an innovation leader in next generation technology and services for an IP connected world’ according to Nokia. The Figure shows the network revenues of the 4 eventual contributors to what will be the new company.

From a regional perspective the combined company would have had a 21% market share in EMEA, 19% in the Americas, but only 14% in Asia Pacific. As such the move looks likely to exacerbate the new nationalism of the ITC industry, although we note that Alcatel Lucent sold 85% of its Enterprise division to China Huaxin at the beginning of 2014.

Of course one of the real challenges for the new company will be profitability. I’ve shown the combined profitability of ITC revenues from the 4 contributors – tagged ‘Nokia Alcatel’ and all the other suppliers in the Figure. Nokia has become much more profitable in 2013 and 2014 – but mainly as a result of taking Microsoft’s money for its mobile phone business. Profitability problems were no doubt a reason why Siemens withdrew from ITC entirely and Nortel decided to disband itself altogether in recent years.

Another challenge will be agility. The network business (and especially the service provider rather than enterprise part) moves like an elephant in comparison with other IT product areas – one reason why NFV is becoming such a key issue for many telcos. I think speeding up technical development will be equally as important as innovation for the newly combined R&D division. It will be particulary interesting to see if the new company crosses over more effectively into the enterprise network market.

The other challenges will be getting the merger approved by the Chinese authorities and getting past the works council in France (although Nokia has already indicated it will making no deeper cuts than already announced by Alcatel Lucent there). It’s less likely to find opposition elsewhere.

Overall this is an important announcement for our industry and for Europe, as it should create a player large enough to challenge to become world leader in a few years time. It’s also refreshing to see some positive news from both Nokia and Alcatel Lucent. Let me know what you think by commenting below.