Coverage: Nokia in talks to buy Alcatel-Lucent

Nokia is looking for a change, and it’s turning to Alcatel-Lucent to provide it. If the deal goes through, Nokia would be poised to be one of the biggest telecommunications companies in the world.

The Wall Street Journal story by Juhana Rossi had these details about the deal:

Nokia Corp. has emerged as the possible engine behind the creation of a telecommunications-equipment titan only years after it was regarded as the laughingstock of the tech world for missing the touchscreen revolution that thrust smartphones into billions of palms around the world.

Nokia said Tuesday it was in advanced talks to buy French rival Alcatel-Lucent SA, a deal that could allow the Finnish company to surpass China’s Huawei Technologies in annual revenue and possibly steal the networking-industry’s no. 1 crown from Sweden’s Ericsson.

If completed, a merger with Alcatel-Lucent would mark the second time the company has reinvented itself in the past decades, extending the saga of a 150-year-old corporation that has put its Nordic home country truly on the global map.

Analysts said a merger with Alcatel-Lucent carried big risks for Nokia, notably because of the difficulty to combine different cultures. Alcatel-Lucent itself was formed through a 2006 Franco-U.S. marriage that had a tumultuous start and yielded years of losses.

Marie Mawad, Francois De Beaupuy and Jeffrey McCracken wrote for Bloomberg that Nokia would likely purchase Alcatel’s wireless unit, not the whole company:

While a full takeover of Alcatel has also been examined, a purchase of the wireless unit remains the most likely scenario, the people said. No agreement has been reached and a deal could still fall apart, they said.

The business had 2014 revenue of 4.7 billion euros ($5 billion), accounting for 36 percent of Paris-based Alcatel’s total sales.

Nokia executives are seeking to secure French state backing for a sale of the assets, said one of the people. Any deal would need a green light from President Francois Hollande’s government, which has previously tried to block corporate mergers in the country. French government officials are working with advisers on a transaction that would protect some domestic research jobs, the people said.

Representatives for Nokia and Alcatel declined to comment on the talks.

Alcatel shares rose 11 percent to $4.48 at 2:55 p.m. in U.S. trading, giving the company a market value of $12.5 billion. Nokia climbed 3.1 percent to $8.31 for a market capitalization of $30.6 billion.

Both stocks jumped for a second day in European trading after Bloomberg News reported on Friday that Nokia is exploring a sale of its maps business known as HERE. Bids are expected soon for the unit, which is valued by Nokia at about 2 billion euros and has attracted interest from companies and private-equity firms, people familiar with the matter said.

Jussi Rosendahl and Leila Abboud wrote for Reuters that the companies could be a good fit, but that mergers in the industry didn’t always go well:

The pair are a good fit in terms of products and geographies, and bulking up would help them cut costs as they try to compete with mobile market leader Sweden’s Ericsson and low-cost powerhouse China’s Huawei.

Nokia would expand its presence in the key United States market where Alcatel-Lucent is a major supplier to operators AT&T and Verizon, and get access to the French firm’s fast-growing, profitable Internet routing business.

But the track record of mergers in the industry is spotty, in part because of the difficulties of cutting costs in a R&D intensive business where companies cannot simply drop products that global telecom operators rely on.

The last round, which gave birth to Alcatel-Lucent and combined Nokia’s networks business with Siemens about a decade ago, saw both firms lose value and market share as rivals went on the attack while they were busy integrating the businesses.

Quentin Webb wrote for Breaking Views in The New York Times that both companies were made from messy mergers and it could take years to see any cost savings:

Overnight, Nokia would add heft in three other segments: fixed-line access, Internet protocol routing and optics. Analysts at Liberum reckon this breadth could prove useful as mobile and fixed-network technology converges.

But for now the lack of overlap means that Nokia has neither synergy potential nor expertise. That is why analysts had seen a purchase of just the wireless unit as simpler and more likely.

By early afternoon on Tuesday, Alcatel’s stock was up 14 percent, reflecting the likely premium in an all-stock deal. Nokia’s stock, which fell sharply in earlier trading, recovered somewhat to stand about 3.7 percent lower. Those shifts add roughly €1.5 billion to Alcatel’s market value and take €1 billion off Nokia’s.

That still looks harsh on Nokia, when Bernstein analysts reckon the synergies in wireless alone could be worth €1 billion a year. But even with seasoned turnaround specialists in charge, harvesting the benefits of a new combination will take years. Both companies are themselves products of messy mergers and protracted restructuring. History might repeat itself.

Nokia will have a lot of work to do no matter if it purchases part of all of Alcatel. Because of the spotting history of mergers in the space and the inability of many companies to find cost savings, it’s going to be hard convince analysts that it’s a good move. But based on Tuesday’s stock moves, investors seem to like it.