Nokia-ALU merger on the cards but a bad idea

Caroline Gabriel/Wireless Watch
Rethink
As Nokia's sale of its handset business draws closer, the markets are increasingly determined that it will spend its €5.44 billion ($7.51 billion) windfall on bolstering its chief remaining business by acquiring Alcatel-Lucent's wireless infrastructure unit for an anticipated €2 billion.
 
The fit seems neat on paper – Nokia will have a record cash mountain of about €14 billion after its handset deal with Microsoft is completed; it has said before that it needs a partner to increase the scale of NSN, which will be its main business post-transaction; ALU's new CEO Michel Combes is a renowned slasher and burner and wants to make more radical divestments than his predecessor; Combes effectively demoted the pure wireless business during his recent reorganization, putting IP systems, and especially the core and edge routers, at the heart of the strategy.
 
All this logic seems overwhelming, so analysts are ignoring all the lessons of history – both companies' disastrously mismanaged mergers in the last decade; the challenges of converging their two product lines and the distraction that would create from competing with Ericsson and Huawei; all those “tying two rocks together won't make them float” warnings. Bloomberg points out that, once Nokia sells the device business, it will have the eighth largest cash pile in Europe among non-finance companies. The danger is that the Finnish firm will behave like a lottery winner, spending its new-found riches without due thought.
 
Not everyone takes this line though. “This deal makes complete sense,” Sami Sarkamies of Nordea Bank told Bloomberg. “Nokia will have the financial flexibility to do this kind of deal and Alcatel needs to slim down. There is a relatively high likelihood of this deal happening.” He also believes Nokia must move quickly in case Samsung decides to bid for ALU's wireless assets, though the Korean firm, which is building up its infrastructure activities, denied interest.
 
Insiders say Nokia is seriously evaluating the ALU option and even that preliminary talks may have taken place. The price it would have to pay would be between €1 billion and €2 billion, according to various estimates, and might enable Nokia to resume dividends payment – as much as 40 cents a share, says one observer.
 
If the companies were to merge, Nokia would gain an additional €3.4 billion in annual sales, excluding services and software, and would have about 32% market share, overtaking Huawei, on about 22% of the global wireless infrastructure space, and getting close to Ericsson‟s 36%. The deal would also bring NSN a better base in the US, where ALU is supplying the top three carriers, but NSN has only gained business with T-Mobile. Verizon, Sprint and AT&T account for about 35% of ALU's revenue while TMo contributes about 4% of NSN's.
 

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