Doing Business | IT & Technologies

April 15, 2015

Nokia Agrees to $16.6 Billion Takeover of Alcatel-Lucent

The Finnish telecommunications company Nokia said on Wednesday that it had agreed to an all-stock deal to acquire Alcatel-Lucent that valued its French rival at about $16.6 billion.

The combined company is expected to become the world’s second-largest telecom equipment manufacturer behind Ericsson of Sweden, with global revenues totaling $27 billion and operations spread across Asia, Europe and North America.

The companies are betting that, by joining forces, they can better compete against Chinese and European rivals bidding to provide telecom hardware and software to the world’s largest carriers, including AT&T and Verizon in the United States, Vodafone and Orange in Europe, and SoftBank in Japan.

The announcement came after the companies had said on Tuesday that they were in advanced talks over a deal, which would represent the latest in a string of mergers in the fast-consolidating telecom sector.

Nokia said that it had offered 0.55 of a new share for each Alcatel-Lucent share, roughly a one-third premium to the company’s stock price before the news of a potential deal was first announced.

Nokia’s chief executive, Rajeev Suri, would run the combined company, which expects the restructuring to save about $1 billion a year starting in 2019.

“Together, Alcatel-Lucent and Nokia intend to lead in next-generation network technology and services,” Mr. Suri said. “We will have a strong presence in every part of the world, including leading positions in the United States and China.”

In early trading in Europe, shares of Nokia rose 3.1 percent while shares of Alcatel-Lucent fell 10.9 percent.

The deal is expected to be completed in the first half of next year, with Nokia shareholders owning 66.5 percent of the telecom giant and Alcatel-Lucent investors holding the rest.

Despite the global popularity of smartphones and widespread Internet access, companies like Nokia and Alcatel-Lucent, which provide much of the equipment underpinning high-speed networks, have struggled to remain profitable.

Faced with a gradual slowdown in how much global carriers are spending to upgrade their cellphone and broadband networks, telecom manufacturers have been forced to consolidate, slash jobs and restructure their operations to bolster profitability.

The announcement on Wednesday was the latest twist in Nokia’s history, whose corporate heritage dates back to the 19th century. The company had been the world’s largest smartphone maker, but it sold its handset division to Microsoft last year after failing to compete with the likes of Apple and Samsung.

After joining Nokia in the mid-1990s, Mr. Suri, an Indian citizen, successfully overhauled the company’s telecom equipment unit by cutting costs and laying off thousands of employees.

Analysts say that Nokia has progressively focused on its equipment unit, which now represents roughly 85 percent of the company’s annual revenue. On Wednesday, Nokia confirmed that it had put its digital maps business — a competitor for Google Maps — up for sale. The division provides less than 5 percent of the company’s yearly sales.

For Alcatel-Lucent, itself a product of a struggling merger in 2006 between Alcatel of France and Lucent Technologies of the United States, Nokia’s offer follows an attempt at restructuring its own operations, announced in 2013, which involved 10,000 job cuts.

This week, French unions expressed concerns that Nokia’s takeover would lead to significant layoffs in the country.

To assuage concerns, both Mr. Suri and Michel Combes, the current Alcatel-Lucent chief executive, met with President François Hollande of France at the Élysée Palace. France’s Economy Ministry also has indicated that it might support the merger.

The French government has frequently intervened to block or alter such deals in conformity with its industrial policy, but Mr. Hollande took a conciliatory approach in its meeting with the two companies’ chief executives on Tuesday, welcoming a combination that would allow the creation of a European champion to fend off competition from China. (The observation seemed to overlook the fact that the market’s global leader is already European: Ericsson.)

It set as its conditions that French jobs be safeguarded and that Alcatel-Lucent’s French research and development activities remain strong.

”Our goal is to continue to create value and jobs in France in the context of a global champion,” Economy Minister Emmanuel Macron told the French daily Les Echos, in an interview published on Wednesday. “It’s the nature of corporations to evolve. My goal is that in a few years Nokia will decide it wants to become French.”

Mr. Macron’s relatively warm welcome contrasts markedly with the hostile response his predecessor, Arnaud Montebourg, gave to Yahoo’s interest in the Dailymotion video website in 2013 and to General Electric’s bid last year for Alstom, the French industrial champion that makes power equipment and TGV trains. Yahoo walked away from Dailymotion, depriving the French company of a big-pocketed investor, while G.E. eventually won Alstom, but only after significantly altering the structure of the deal and bringing in the state itself as an investor.

Part of the explanation for Mr. Macron’s greater receptivity is probably that he is an investment banker by training, while Mr. Montebourg is a standard-bearer of the left wing of Mr. Hollande’s Socialist Party.

But French officials often act as the public face of the technocratic elite who actually run the government ministries. The embrace of Nokia shows the technocrats’ recognition that Alcatel-Lucent needed outside help: The company has lurched from one crisis to the next since its formation, shedding jobs and losing its competitive mojo in a rapidly evolving market. Its prospects for the future could portend more of the same.

Alcatel-Lucent’s problems had long been a cause of concern for the government, and Mr. Macron last year had even raised the possibility of some kind of deal with Samsung. “Nokia was the better deal,” he said in the Les Echos interview.

Whether combining it with another also-ran with big dreams will result in the creation of a global champion remains to be seen.

Analysts voiced doubts about whether Nokia would be able to significantly reduce its operations in France.

“The French government won’t want Nokia to cut jobs in France,” said Neil Campling, an analyst at Aviate Global in London. “For this to work, there has to be significant job cuts. I’m skeptical about how this will play out.”

Text by The New York Times
 

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