Analysts have generally backed Nokia’s proposed takeover of Alcatel-Lucent announced yesterday (15 April 2015), but have noted that similar telecoms mergers and joint ventures have proved both difficult and in some cases unrewarding – not least of which are the ones undertaken by these very companies.
The merger of France’s Alcatel and Lucent, the offshoot of US telecoms giant AT&T, saw it burn up cash and operate at a loss, while the 2007 NSN joint venture between Finland’s Nokia and Germany’s Siemens could not be described as an unqualified success either. Nokia eventually bought out Siemens in 2013.
Frost & Sullivan’s senior analyst for Information & Communication Technologies, Europe, Sheridan Nye, commented: “The challenge is to convince employees and shareholders that cultural integration will be more effective than at either Alcatel-Lucent or NSN, both of which suffered from fragmented governance of merged companies with strong cultures and histories.
“Almost exactly 10 years ago, French national champion Alcatel merged with Lucent, AT&T’s former technology arm, but the deal largely failed to realise its potential. Nonetheless the company’s customer base in North America now represents its most valuable asset.”
Daryl Schoolar, principal analyst, Intelligent Networks at Ovum, observed in a blog published this week: “Nokia and Alcatel-Lucent both provide very real examples of mergers and acquisitions that have gone wrong. In fact, one can easily argue if Nokia’s past hook-up with Siemens and Alcatel’s merger with Lucent had gone better, this deal would not be taking place.”
However, he pointed out that Nokia’s 2011 acquisition of Motorola’s network division does indicate the company learned its lesson with Siemens and is much better now at executing on acquisitions. ‘Still, both companies must overcome important hurdles for this current acquisition to work.’
The combination of the two companies will create a company ranked second in the sector with combined 2014 net sales of €25.9 billion and operating profit of €300 million. Nye said: “This long-awaited move is primarily a defensive one. Neither Nokia nor Alcatel-Lucent alone could realistically take significant share from market-leader Ericsson, or fight off aggressive competition from Huawei.’
Nye added: “The merger creates a competitor that is stronger than the sum of its two parts. The timing is also good as both companies have completed the worst of their cost cutting programmes and Nokia has extracted itself from the lacklustre Nokia Siemens Networks (NSN) joint venture.”
Shanthi Ravindran, senior analyst at Analysys Mason, agreed: “Nokia Networks has also just completed a round of divestments and restructuring, to focus itself on its core strength in mobile broadband. The acquisition comes at a good time to combine portfolios, after additional mobile product line rationalisation.”
He went on to observe: “Nokia’s acquisition of Alcatel-Lucent gives the company a much stronger share of the communications service provider infrastructure, software and services market. However, for success, Nokia must do a complete acquisition and be able to perform a portfolio rationalisation very fast, or it can suffer the worst pains of its former mergers.”
Schoolar concurred with that view, saying: “There is significant portfolio overlap between the two vendors, especially in the area of radio access networks. Painful and difficult decisions will have to be made on how to reshape the newly created company. But, assuming proper management of this acquisition, it can lead to some major changes in the vendor landscape for telecoms gear.”
However, this will be easier said than done. “Implementation will take time and money and effective management will determine whether it succeeds or fails. Nokia also needs to convince competition regulators – notably in the United States and China – to approve the deal, a process that could take several months,’ pointed out Nye.
A key potential stumbling block, the French government, has been appeased by a commitment to cut no more jobs in France than those already specified under Alcatel-Lucent’s Shift Plan. Nokia has also committed to boosting R&D jobs by around 500 in the country and to provide €100 million to back French start-ups. However, this means the job cuts will hit other countries, although it is not clear yet which ones.
Nokia is likely to have calculated that the EC will welcome a more powerful European telecoms technology player and will not oppose the deal. US and Chinese regulators may prove more difficult to convince, however.
So, how does the deal benefit the two companies? Ravindran said: “Nokia Networks gets access to key Tier1 customers in US, which it was lacking, as well as to customers in China through the subsidiary Alcatel-Lucent Shanghai Bell. Asia and Africa are markets that are still in very early stages of 4G planning and these markets present opportunities for Nokia Networks to take market share away from its closest competitors, Ericsson and Huawei Technologies.”
He continued: “Nokia Networks acquires a key product-focused portfolio from Alcatel-Lucent, including IP transport network, optical technology, specific network analytics and wireless technology assets, which should enable the combined company to compete more effectively with Ericsson and Huawei as more operators, particularly, large Tier1 operators, move towards fixed mobile convergence (FMC).”
He also noted that fixed broadband is a resurgent area now and in the future, with related connected home and FMC opportunities. “Hence, having a strong position in this area will be key for Nokia Networks to position itself at the top, ahead of its closest competitors.”
Ravindran continued: “The acquisition of Alcatel-Lucent also gives Nokia an OSS portfolio and Nuage Networks that provides it with WAN-SDN solutions and access to a broader range of customers. But this acquisition does not provide it with products to address the BSS space.”
Looking ahead, Ravindran noted: “The combined company will have a well-rounded portfolio that can cater to the requirements of CSPs engaged in optimising and monetising their networks and in moving towards virtualisation and the digital economy in the long-term. However, the manner in which the Alcatel-Lucent assets are integrated will be key to success in this area.”
He concluded: “The deal is expected to be finalised in the first half of 2016, but it will take much longer for the portfolio rationalisation to have an effect on the market. In the meantime, this will create a slowdown in infrastructure deals and could result in an advantage for the competitors.”
Nye said: “The passing of the Alcatel and Lucent names into history will be mourned by some, but ultimately it is more important to enter the next phase of telecom transformation under a single, unified banner.”
Schoolar pointed to the fact that Nokia’s management has been talking for some time about how they thought there was only room for three major RAN vendors. “This acquisition makes sure Nokia is one of those three. It strengthens Nokia in the area of small cells/HetNet and SDN/NFV, and ensures Nokia has a significant RAN position with all four major US mobile operators. If 5G turns out to be more of an evolution of 4G than a total network refresh, a vendor’s current LTE customer base will be a significant contributor to 5G success.”
If the new Nokia does manage to pull the two companies together successfully it will present its rivals with some serious competition Schoolar believes. “The new Nokia would become a very close and strong number two to Ericsson in the RAN market. And, unlike the current number-two Huawei, Nokia doesn’t have problems selling into the US.
He continued: “A strengthened Nokia will make it tougher for ZTE and Samsung to grow their mobile gear businesses outside of their domestic markets. A big part of being a RAN vendor is services. Profitable services require a large customer base to share the cost of those services to make them profitable. This is a clear advantage the new Nokia will have over ZTE and Samsung.”
However, Schoolar noted that the acquisition is far from completed and until then Ericsson, Huawei, Samsung, and ZTE are likely to take advantage of the market uncertainty created by the proposed transaction to try to grab share from both Nokia and Alcatel-Lucent.