Alcatel-Lucent (ALU) and Nokia have confirmed that they are in discussions for the Finnish company to buy its French rival. And, while valuation of Alcatel-Lucent’s assets remains an item of discussion, it appears that talks have reached a critical stage.
Such a deal would be a departure from Alcatel-Lucent CEO Michel Combes “Shift Plan” the last few years which has incurred major cost cutting and restructuring moves that finally have the company rebalanced after years of financial problems associated with the deal that saw Alcatel merge with Lucent. Certainly, a shift in ownership would be a different type of shift.
This is not the first time the two companies have discussed some kind of combination. There have been rumors of a deal for years, and they have been particularly hot since Nokia’s sale of its handset business to Microsoft. It represents a classic case of as we say in the U.S., “keeping up with the Joneses.” Both companies are in an intense struggle to fend off the growing global market domination of China’s Huawei and Sweden-based Ericsson in core markets sectors and regions.
The goal of a combination is to create a stronger “third competitor,” particularly in the wireless infrastructure business. However, it is also about the burgeoning software defined networking (SDN) and network functions virtualization (NFV) sectors as service provider network transformations to more software-control and cloud services become the consensus path to the future. Commoditized hardware is out. Software, including dealing with the increased popularity of open source solutions as embraced by Alcatel-Lucent, is in.
This deal is being described as a “full combination” and not a merger. This means Nokia would make a public offer for Alcatel-Lucent stock. Alcatel-Lucent currently has a market capitalization of roughly €11 billion ($11.6 billion), while Nokia’s market cap is about €28 billion ($29.7 billion). It could be problematic for Nokia to buy all of the stock, as consideration of the sum of the parts could be more than the whole. For example, the ALU wireless business alone has been valued at roughly $10 billion by analyst.
Strengths and weaknesses
Multiple opinions have already been posted about what such a combination would mean in terms of strengths and weaknesses.
On the plus side, Nokia would gain better traction with its wireless business in the key North American market where Alcatel-Lucent has a strong position with the major service providers. They would also expand their ability to have broader conversations with fixed as well as mobile service providers based on ALU’s portfolio of core network and IP routing solutions and the companies growing role in SDN/NFV with its CloudBand program and Nuage business unit. In addition, while ALU has not established the market share in global markets for its macro cellular product lines, it is a recognized leader in the small cell area—where Nokia needs help if it is to compete aggressively and be positioned as an end-to-end wireless solutions provider.
That said, the history of such combinations for both companies is troublesome. As mentioned, it has taken a lot of shareholder and employee pain and many years to get Alcatel-Lucent on firmer ground. For its part Nokia, had to jettison its handset business which had been the high runner for years, and was forced to buy out its own partner Siemens when the merger that created Nokia-Siemens failed. As one industry observer noted, there could still be residual issues that mean this is not a melding of two companies but rather of four.
There is an old Chinese proverb about the challenges of merger and acquisitions which roughly translated is, “same bed different dreams.”
In addition, blocking and tackling issues are caused by some indeterminate meshing of the portfolios of both companies, especially as it relates to duplication in wireless products, and how to rationalize relationships with various accounts on a host of levels. Again history says such rationalization can cause a financial hit and stock market reactions have already been as expected. Nokia’s stock has been down and Alcatel-Lucent’s has been up.
Another strength is that Nokia’s CEO Rajeev Suri seems to be the one behind making what apparently started as an overture to buy ALU’s wireless assets a full blown acquisition. It would enable him to avoid the messy part of sorting through a merger and give him the final say on how best to speed up a repositioning of a combined company’s assets.
A big point in the weakness column as reported by Reuters is that French national pride is at stake and the French government is more than a bit concerned. French Labor Minister Francois Rebsamen is quoted as saying in response to a parliamentary question on Tuesday: "The government wants the details of this project which is being discussed to be presented to it as quickly as possible," particularly regarding production sites. He added, "The government will also be very watchful to ensure the excellence of research laboratories in France be maintained and that the location of decision-making centers and the outlook for investment in the country be clarified for the long-term."
It was interesting that he did not voice concern about the future of Bell Labs here in the U.S., whose celebration of its Noble Prize winners and view of the future took place last week. One would think that a changing of control might cause a bit of interest, who knows whether good or bad, by policy makers on this side of the pond.
Finally, while much of the early concentration of opinion has been around what the combination means to the companies, their competitors, regulators and shareholders, the real questions ultimately will come from how the customers feel. Back in the days of proprietary hardware solutions with their proprietary software releases, the common refrain from network operators was their dislike of what was called, “the tyranny of the releases.” It was one reason why they were always careful for pricing as well as not being locked in to any single vendor to have competitive options when it came to their dealings with infrastructure vendors.
Whether a shrinking of choices in a world where software-centricity is the future and open source is an option, the devolution of the major vendor population into an oligopoly might not be something the big customers will think is a good. That said, whether this skepticism trumps service provider desires to narrow their lists of important “trusted” vendors is an interesting question.
Realities are that this latest rumor of a reshuffling of the vendor deck is not a surprise. As I have written in several postings over the past months it has been clear that industry restructuring was going to be a dominant theme for the next 12 to 18 months for a host of reasons relating to competitive pressures and the quickening pace of innovation and market disruption. What is also clear is that what happens in this time frame will be a watershed mark in industry history, as decisions made will have dramatic repercussions for many years to come.
We live in very interesting times. This deal is one to watch but there are likely to be more surprises down the road. After all it is only April.
When the WannaCry ransomware attacked companies all over the world in 2017, experts soon realized it was meant to be stopped by regular updating. Even…
TMC recently announced the launch of three new artificial intelligence events under the banner of The New Intelligence. I recently spoke with TMC's Ex…
Organizations must align internally to achieve effective innovation. Companies should consider creating cross-functional teams or, at a minimum, incre…
The three events that are part of The New Intelligence are all about how businesses and service providers, and their customers, can benefit from artif…
TMC announced the launch of The New Intelligence conference and expo - The Event Powering the AI Revolution. This exciting new event will take place o…