Nokia Acquisition of Alcatel-Lucent is Confirmed

By Peter Bernstein April 15, 2015

It turns out that the characterization of talks between Nokia and Alcatel-Lucent yesterday as being “advanced” and “critical” were true.  The two telecom infrastructure solutions providers made their intention to combine official today with the announcement of a memorandum of understanding (MoU) under which Nokia will make an offer for all of the equity securities issued by Alcatel-Lucent, through a public exchange offer in France and in the United States.

The deal will be done on the basis of 0.55 of a new Nokia share for every Alcatel-Lucent share. The all-share transaction values Alcatel-Lucent at EUR 15.6 billion ($16.6 billion) on a fully diluted basis. This corresponds to a fully diluted premium of 34 percent (equivalent to EUR 4.48 per share), and a premium to shareholders of 28 percent (equivalent to EUR 4.27 per share), on the unaffected weighted average share price of Alcatel-Lucent for the previous three months. This is based on Nokia’s unaffected closing share price of EUR 7.77 on April 13, 2015.

The MoU was agreed to by the Board of Directors of each company and the transaction, subject to shareholder and regulatory approval is expected to close in the first half of 2016. 

Transaction highlights

The combined company will be known as Nokia Corporation.  As the companies state: “The combined company will have unparalleled innovation capabilities, with Alcatel-Lucent’s Bell Labs and Nokia’s FutureWorks, as well as Nokia Technologies, which will stay as a separate entity with a clear focus on licensing and the incubation of new technologies.” 

In terms of the assets of the combination, it will have more than 40,000 R&D employees and spend of EUR 4.7 billion ($6 billion) in R&D in 2014, and is being promoted for establishing an enhanced entity that is positioned to accelerate development of future technologies including 5G, IP and software-defined networking, cloud, analytics as well as sensors and imaging.  In short, it will be focused on what are extremely promising growth opportunities going forward.  

Some of the highlights of the transaction along with its price include:

  • Alcatel-Lucent shareholders would own 33.5 percent of the fully diluted share capital of the combined company, and Nokia shareholders would own 66.5 percent, assuming full acceptance of the public exchange offer .
  • The combined company will be called Nokia Corporation, with headquarters in Finland and a strong presence in France. Risto Siilasmaa is planned to serve as Chairman, and Rajeev Suri as Chief Executive Officer.
  • The combined company’s Board of Directors is planned to have nine or ten members, including three members from Alcatel-Lucent, one of whom would serve as Vice Chairman

Assuming the closing of the transaction in the first half of 2016:

  • The combined company would target approximately EUR 900 million ($952.7 million) of operating cost synergies to be achieved on a full year basis in 2019.
  • The combined company would target approximately EUR 200 million ($211.7 million) of reductions in interest expenses to be achieved on a full year basis in 2017.
  • The transaction is expected to be accretive to Nokia earnings on a non-IFRS basis (excluding restructuring charges and amortisation of intangibles) in 2017.
  • A strong financial profile on which to grow and invest: on a FY2014 combined basis, the proposed company would have had net sales of EUR 25.9 billion ($27.4 billion), a non-IFRS operating profit of EUR 2.3 billion ($2.4 billion), a reported operating profit of EUR 0.3 billion ($3.2 billion), R&D investments of approximately EUR 4.7 billion ($5.0 billion), and a strong balance sheet with combined net cash at  December 31, 2014 of EUR 7.4 billion ($7.8 billion), assuming conversion of all Nokia and Alcatel-Lucent convertible bonds (for basis of preparation see Appendix 2).

The CEOs’ comments

Rajeev Suri, President and Chief Executive Officer of Nokia, said: “Together, Alcatel-Lucent and Nokia intend to lead in next-generation network technology and services, with the scope to create seamless connectivity for people and things wherever they are. 

Our innovation capability will be extraordinary, bringing together the R&D engine of Nokia with that of Alcatel-Lucent and its iconic Bell Labs. We will continue to combine this strength with the highly efficient, lean operations needed to compete on a global scale.

We have hugely complementary technologies and the comprehensive portfolio necessary to enable the internet of things and transition to the cloud.  We will have a strong presence in every part of the world, including leading positions in the United States and China.

Together, we expect to have the scale to lead in every area in which we choose to compete, drive profitable growth, meet the needs of global customers, develop new technologies, build on our successful intellectual property licensing, and create value for our shareholders.

For all these reasons, I firmly believe that this is the right deal, with the right logic, at the right time.”

Michel Combes, Chief Executive Officer of Alcatel-Lucent, added:

“A combination of Nokia and Alcatel-Lucent will offer a unique opportunity to create a European champion and global leader in ultra-broadband, IP networking and cloud applications. I am proud that the joined forces of Nokia and Alcatel-Lucent are ready to accelerate our strategic vision, giving us the financial strength and critical scale needed to achieve our transformation and invest in and develop the next generation of network technology.

This transaction comes at the right time to strengthen the European technology industry. We believe our customers will benefit from our improved innovation capability and incomparable R&D engine under the Bell Labs brand. The global scale and footprint of the new company will reinforce its presence in the United States and China.

The proposed transaction represents a compelling offer for our shareholders both in terms of upfront premium and long term value creation potential. Shareholders of Alcatel-Lucent now have the opportunity to participate in the future upside of the industrial project that they have supported during the last two years, through a stronger combined business with greater global scale and a better position for the longer term. The new company will also provide our employees exciting opportunities to be part of a global leader.”

A disturbance in the force

Yesterday was a day for evaluating the strengths and weaknesses of such a combination. By and large the consensus view can be summed up in the saying, “You gotta do what you gotta do!”  While there are always risks involved in such major transactions, particularly cultural and political ones, the facts are that the French government has backed away already from its early skepticism about deal and global competitive pressures have made this in essence an imperative for both companies. 

We live in “The Age of Acceleration” where the only constants are change and the speed at which it is increasing.  In this brave new world, creating ecosystems that can help service providers and enterprises accommodate change more adroitly, and deal with the massive and complex issues involved in becoming more agile, software-centric and secure require vendors to have the resources to be responsive. They also must have the financial ability to invest in innovations, organic as well as through M&A in the face of competitors who have such resources. 

This is why this transaction makes sense even in the face of substantial uncertainties about the abilities of management to meld the combined assets quickly and in a manner that creates shareholder value along with customer trust.  In order to compete against Ericsson and Huawei specifically along with Cisco, ZTE and a few other major players, this deal almost was inevitable. 

Image via Shutterstock

Most people will be watching the stock prices of Nokia and Alcatel-Lucent closely. They will be paying attention to management’s ability to meld the resources and do so while achieving satisfactory financial results. However, maybe the better things to watch will be customer sentiments about how they feel about the acquisition, and what this means for vendor industry structure. 

There has been a disturbance in the force. The likelihood, as has already been reflected in the volatility of stock prices for other players in the markets the new Nokia will compete in, is that this transaction is going to accelerate a reshuffling of the vendor deck in what would be profound ways. 

Several months ago Cisco CEO John Chambers remarked that it was his belief that five years from now more than one of the world’s top computer companies would no longer be around.  He was careful not to speculate as to which ones those might be.  Interestingly, he could have said the same about the big networking vendors as well. 

In regards to industry restructuring, it is more likely that we are at the end of the beginning than that we are at the beginning of the end.  The hunters across the entire ICT landscape have competitive imperatives to be aggressive. With the advent of a programmable and connected world where convergence has become reality instead of hyperbole and where the boundaries of market demarcation are disappearing at an accelerating pace, there are significant players in traditionally adjacent spaces who see the need to expand into those spaces and who have yet to be heard from. 

In short, hang onto your hats.  This is going to be a wild ride. The future of the digital world is very much up for grabs. 




Edited by Dominick Sorrentino
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