After years of on-off discussion and persistent industry speculation, Nokia has confirmed it will acquire Alcatel-Lucent (ALU), its rival in the telecom equipment business, for EUR 15.6 billion (a 28% premium for shareholders). Subject to regulatory approval, the all-paper deal is expected to close during the first half of 2016.
The merger of near-equals will create a company ranked second in the sector with combined 2014 net sales of EUR 25.9 billion and operating profit of EUR 300 million.
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. 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.
But 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.
In effect, this ‘merger’ could be seen as a takeover as the new Nokia Corp will be headquartered in Finland and Nokia’s Rajeev Suri will continue as CEO. But 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.
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.