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Deal: Nokia wants to acquire Alcatel-Lucent, but is it worth the risk?

Deal: Nokia wants to acquire Alcatel-Lucent, but is it worth the risk?

The Finnish company Nokia, the producer of Nokia 1100, the best-selling mobile phone of all time, agreed to buy French global telecommunications equipment rival Alcatel-Lucent for an all-share price of €15.6 billion ($16.6 billion).

The previous growth and success of both companies have given a strong sense of national pride to their citizens. Nokia was the leading global mobile phone manufacturer not too long ago, with 1 per cent of Finns working for the company. Much has changed since then, after Nokia was unable to win the smartphone battle against its rivals. A large restructuring plan followed in 2011 and job cuts were made. Its mobile phone division was sold to Microsoft in 2013, leaving Finns extremely disappointed to sell what was once Nokia’s “crown jewel”. The news about the takeover bid of Alcatel Lucent has made Finns regain their trust in Nokia. As one former Nokia employee claims: “[Finnish people] can be proud again of Nokia and that feels great.”

On the other hand, some have been reserved about the merits of the takeover. The deal has no cash element, despite the combined companies possessing around €8 billion in net cash and a potential asset for sale; Nokia’s mapping division that is worth at least €2 billion. This has left shareholders disappointed that they cannot get some immediate profit out of the deal. Nokia’s management has, however, decided that improving the company’s credit rating is the priority and that leaving a substantial amount of cash on the balance sheet can substantially help towards this. The takeover bid, giving a 28 per cent premium per share over the average stock price over the last three months, seems not to have been enough for Alcatel’s shareholders. Nokia’s shareholders will own roughly 66.5 per cent of the combined business, which will have its headquarters in Helsinki. The current Nokia chief executive will be in charge and “Nokia Corporation” will be retained as the company name. This has left some to claim that the deal is clearly not “a merger of equals” and that Alcatel shareholders may indeed not be getting enough out it.

The French authorities have been extremely clear that they will only offer support for the takeover if jobs in France remain largely unaffected.  The French State disapproval of foreign ownership of French companies has been revealed multiple times, such a when GE expressed an interest in acquiring Alstom, a French industrial company or in the case of the hindered sale of Dailymotion to a Hong Kong telecoms group. The French State has a strong saying in these negotiations since it holds some shares in many big French companies, seen as “strategic assets”. The support that the French Minister of Economy offered during the Nokia-Alcatel talks came only at the price of maintaining the jobs and the research & development facilities in France, as well as spending €100 million on setting up an investment fund to back French start-ups. Not much has been revealed about Nokia’s commitment to keep the same number of jobs in Finland and it is quite straightforward that the cost reduction should lead to job reductions somewhere outside France.

Nokia’s move away from mobile phones and towards telecommunication systems was strengthened by the acquisition of Siemens’s equipment division in 2013 and the new takeover of rival Alcatel seems the obvious move in its battle against rival telecom equipment groups: Swedish Ericsson and Chinese Huawei, in an industry where scale matters. However, the synergy with Siemens less than two years ago has caused a reduction in the number of jobs, and Finns are afraid more will follow if Nokia merges with Alcatel.

Alcatel-Lucent has also encountered problems in the past, Alcatel’s 2006 merger with Lucent being described as “a nightmare fusion of two weak companies with vastly different cultures.” While Nokia has managed to quadruple its share price since its all time low in 2012, Alcatel-Lucent has not been doing so as it has not generated positive free cash flow since 2005 and its market capitalisation has fallen dramatically.

Rajeev Suri, the chief executive of Nokia explains that the merger can be seen as a response to consolidation in the telecom industry. The BT acquisition of EE in the United Kingdom represents a perfect example of telecom operators looking into bundling their offerings into landline services, mobile services and TV offerings in order to offer more attractive prices to consumers. Nokia has been concentrating their efforts on mobile Internet, while Alcatel’s strength lies in fixed broadband. A merger between the two corporations offering complimentary services makes the deal about “scope, first and foremost”. This is good news since many of the companies that have rushed into merging in order to cut costs have failed to show that their synergies are successful. This deal is, however, expected to also offer cost reduction of €900 million and an interest expenses reduction on borrowed funds of €200 million.

The deal will also allow the two companies to keep up with the new, emerging directions of technological advancement such as the Internet of Things, while also facilitating a move towards cloud technology.

Nokia’s shareholders have also not been as enthusiastic about the prospects of the merger as expected. The deal is seen as risky since Nokia is not only acquiring Alcatel’s wireless business, but also the whole of its operations. Both companies have experienced a lack of sales growth in recent years and have been struggling with consolidating their previous mergers; leaving some to believe that this new merger might have not come at the right time. A former Nokia director told the Financial Times, while questioning the German-Finnish-French-American Siemens-Nokia-Alcatel-Lucent: “you would be trying to meld together four companies, not two, and four cultures, not two. That sounds like a recipe for disaster to me”. Most share the same view; since the deal was announced, Nokia’s shares has lost 4 per cent of their value and Alacatel-Lucent’s has lost 21 per cent. Some other analysts, however, claim that the companies’ struggles in the past have been the cause of new entrants in the market such as Huawei, ZTE and Samsung and as long as there is no such new entrant offering 5G technology, this deal could work.

The merger will be subject to regulatory approval in 9 countries. The antitrust hurdles in the US are particularly noteworthy. Huawei exited the US market when Washington accused the company of having links with the Chinese government and cyber warfare intentions. This would leave only two big major providers of telecoms equipment: Nokia/ Alcatel-Lucent and Ericsson. Approval from the Chinese authorities has been problematic for Nokia in the past, when the People’s Republic of China delayed its sale of its devices division to Microsoft. In the EU, the Commission is expected to be in favour of the deal, as it creates a strong European company that’s able to keep up with overseas rivals.

The legal advisor for Nokia is Skadden, Arps, Slate, Meagher & Flom,  while Alcatel-Lucent’s legal advisor is Sullivan & Cromwell. JP Morgan Chase is the financial advisor of Nokia while Zaoui & Co acts for Alcatel- Lucent.

The deal is expected to close in the first quarter of 2016 at the earliest.

 

 

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