Nokia Oyj and Alcatel-Lucent have made a joint announcement that they are in “advanced discussions” regarding a “full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent.” In other words, the Finnish business, Nokia, is contemplating buying French mobile telecommunications equipment manufacturer, Alcatel-Lucent. This potential deal has been mooted for some time now as both businesses have been struggling against larger competitors – the joint announcement also warned that these discussions could still fall apart.
These two network component businesses are a good fit in terms of geography and products and the new combined business would benefit from cost cutting, which typically means shedding staff. Nokia Oyj and Alcatel-Lucent are seen as being the two weakest European telecommunications supply manufacturers. Nokia have relatively little presence in the United States cellular market, where Alcatel-Lucent is a major supplier to both AT&T and Verizon Wireless. Stronger players in the telecom equipment market include Ericsson and Huawei.
Any such deal faces difficulties: one is that simply combining the two weakest businesses in the market and hoping that cost cuts will improve things is dangerous thinking. Following any such merger, there is a period of consolidation or indigestion as the combined businesses realigns itself. When Alcatel-Lucent was formed around ten years ago, Nokia combined their network business with Siemens and largely because of the distraction of these corporate restructuring, both new combined businesses lost ground compared to the competition, losing shareholder value and market share. The other very real difficulty is political, specifically the French government’s involvement where they may step in to protect jobs in a critical industry sector for the French economy. Alcatel-Lucent has around 52,000 employees around the world and approximately 6,000 are in France. A spokesperson for the French Economy Ministry said the Government wanted more information about the deal, including the rationale and if it could create a European champion for the sector – as well as the impact on French employees. France has significant power to block foreign takeovers in the defense, energy, water, transport, healthcare and telecom sectors.
The Alcatel stock price increased by over 12.5% on Tuesday morning whereas Nokia stock dropped almost 7% in value as the market reacted to the news. There have been other stories in the media focusing on Nokia buying Alcatel-Lucent’s mobile networks division, which would be a simpler deal (and leave the French firm much smaller following the acquisition). Industry experts do not believe either Ericsson or Huawei are in a position to counter-bid for Alcatel-Lucent’s networking business owing to the size (of Ericsson) and political opposition (in the case of Chinese company Huawei’s potential ownership of the French company).