Nokia and Alcatel-Lucent have confirmed rumours about a possible merger by saying it will happen, as “The two companies have entered into a memorandum of understanding under which Nokia will make an offer for all of the equity securities issued by Alcatel-Lucent”.
Each Alca-Lu share will be exchanged for 0.55 of a new Nokia share, a method of getting this done that “values Alcatel-Lucent at EUR 15.6 billion on a fully diluted basis, corresponding to a fully diluted premium of 34% (equivalent to EUR 4.48 per share), and a premium to shareholders of 28% (equivalent to EUR 4.27 per share) (see Appendix 1), on the unaffected weighted average share price of Alcatel-Lucent for the previous three months.”
Nokia's canned statement features president and CEO Rajeev Suri offering this analysis of the deal:
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.
Alca-Lu CEO's canned quote says “The proposed transaction represents a compelling offer for our shareholders both in terms of upfront premium and long term value creation potential,” important words given delivering shareholder value is his job.
He also tossed in this verbiage:
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.
Both parties reckon the combined company will grow faster than either would have done alone, and have a bigger opportunity.
Theres some downside of course, notably the “approximately EUR 900 million of operating cost synergies to be achieved on a full year basis in 2019” that will come from “Organizational streamlining, rationalisation of overlapping products and services, central functions, and regional and sales organizations.” Translation: job cuts in the back and front offices. There'll be pain for suppliers, too, because there's an expectation of “Reduction of various overhead costs in real estate, manufacturing and supply-chain, information technology, and overall general and administrative expenses”.
Once all the lawyering is done, the new business will operate under the Nokia brand and have its headquarters in Finland. Bell Labs will stay as a brand denoting innovation and R&D.
The deal was announced at 08:00 central european time, so reactions are yet to emerge.
Analyst firm Ovum yesterday offered the following commentary on the transaction, based on speculation. Here's what chief research officer Mark Newman had to say:
When you consider the strengths and weaknesses of Alcatel-Lucent and Nokia and their product portfolios, a merger of the two businesses seems logical. Nokia is a mobile-only equipment vendor, while Alcatel-Lucent’s strengths are in the fixed network business (especially core network and IP routing). It has long-struggled in the wireless business, and its attempts to become a leading player in LTE have failed. Alcatel-Lucent has also been active in SDN/NFV with CloudBand and Nuage and aggressive with small cells – areas where Nokia is perceived to be lagging behind competition.
But there are also risks. A full merger would plunge both businesses back into a period of introspection and restructuring. It would create significant duplication in areas such as mobile broadband and small cells. Maintaining two different product portfolios and servicing existing customers would counteract the benefits of increased scale.
The statement announcing the deal knocks some of those issues on the head, seeing as it flags product consolidation. Yet mergers and acquisitions folk of your correspondent's acquaintance have said their efforts sometimes mean the sum of one plus one produces a result of 1.6 or more. ®
Nokia's announcement also comments on its HERE maps business, saying “it has initiated a review of strategic options for its HERE business. That review is ongoing, it may or may not lead to a transaction, and any further announcements about HERE will be made in due course, as appropriate.”