Nokia and Alcatel-Lucent – an integration challenge

Nokia recently in mid-April announced its intent to buy-out Alcatel-Lucent for Eur 15.6B (then valued at $16.6B, and recently at $17.3B, thanks to the Euro slide against the US$) to become the second largest telecom infrastructure company in the world, behind Ericsson from Sweden.   The Chinese giant Huawei is seen as their biggest threat presently ranked third and they are growing rapidly in all technology fronts.  Given that all these giants are seeing their mobile infrastructure business coming down and there is a huge potential in the IP/cloud /TV & Media area, this consolidation may still be questionable as originally Nokia had wanted only ALU’s wireless business, if insider reports are to be believed but they ended up with ‘all-or-nothing’ package.

    For some background, Alcatel –Lucent (ALU) has about 52K employees worldwide, of which 6000 are in France approximately, and was facing weak growth prospects having not turned a profit for a while now. Nokia has a worldwide strength of about 62000 of which 6900 employees are in Finland.  Hence it is safe to say that the employee strength in their ‘head-quartered’ country is about 11-12%.  Nokia (the former NSN) and ALU have a market cap of about $26.3B and $11B.  ALU’s revenue was pegged at $15.4B and they have about $6.8B in cash.   Remember that ALU was still going through their SHIFT Plan for the past couple of years – this plan made them concentrate on four areas: IP routing and transport, Wireless, IP platforms and Fixed networks.  Looks like executing to these plans had been their challenge recently.  With this acquisition, Nokia gets a significant boost in their North American market, their research capabilities (thanks to the former Lucent labs) and also gets to add on to their Optical business, which is a big win for them.  As for ALU, not sure what their gain is.

      Given that Nokia approached ALU with a buyout target which was a couple of billions lower than the one announced, and before meeting with the French President , it is safe to say that there has been some good monetary provisions made for any potential ‘structural repercussions’  if this transaction goes through.  France, a much loved labor oriented socialist country, has announced there would be no job loss there but it is up to anybody’s guess as to what happens in a ‘protective’ European community  

    Let me digress a little about Nokia and sync up the readers about they are now – they are not what we know them to be (a mobile company).   This is the Nokia Services Network (name changed after Nokia bought out the share of Siemens from Nokia Siemens Network) and the original ‘mobile’ Nokia Research division (Nokia Technologies) and the HERE (aka OVI or Services division of ‘mobile’ Nokia once, largely still the NavTeq acquisition assets).  HERE maps seem to be making a good business in the entire automotive and embedded navigation segment through the European vehicle manufacturers and since this does not fit into the scheme of things of the present Nokia, it is being seen as a unit that would be sold soon, if the price is right.  No suitors till date for this unit.   But they are making close to 300M euros.   And if the present Nokia does have thoughts of entering the mobile handset market again, through the Alcatel acquisition (yes, there are Alcatel phones but not sure if they are part of ALU), they cannot use the Nokia name for a few more months hence, according to the agreement with Microsoft.

     It had been an integration challenge both for Nokia and Siemens, and for Alcatel and Lucent when they decided to merge with each other.   When it comes to integration, my guess is Cisco has it to an art form as most of their business is driven through inorganic routes.  This Nokia-ALU combine may not put too much pressure on Ericsson at this point as they are already structured along the future potential  Cloud, IP and TV/media areas along with being the leaders in the BSS/OSS segment and in the Radio systems area.   If there is a hole in Ericsson strategy going forward, it may be on the Optical side where lots of companies like Ciena, Infinera etc. specialize and in the network energy space that takes care of Data centers (given the boom of E-commerce, esp. in the Asia region).   

    Before I look one level down from their individual structure of Nokia and ALU, let me highlight where Huawei stands.  They, like Samsung of the mobile client world, seem to be pitching in all areas to cover their wide base.  They seem to have a solid Wireless (BTS, Small Cell) and Wired (Fixed Access, Datacom, Transport network) stream, carrier software (aka BSS), Core networking products, Data center and Network Energy (hot field of interest now), IT which encompasses both cloud and storage, and all enterprise products (to compete head-on with Cisco) as well as a reasonable consumer division (which takes care of most of the client like mobile, media and home).

      Now when it comes to Nokia and ALU, there are lots of high level domain redundancies in their IP networking and Access suites like Customer Experience Management  (ALU had acquired Motive a few years ago), Small cells , Subscriber Data management  and their IP Multimedia system.  Of course, the usual operation support function like HR, recruitment, IT support, sales and marketing would all have deep impacts.   But a good part of recent investments by ALU in Analytics, Cloud, and content device management would stay and grow together as Nokia has not yet concentrated in these segments along with their recent alignment towards anything Internet Protocol.   The original Bell Labs of ALU would have to merge with Nokia Technologies and form a giant of a research division that would be regarded as the best in the world.

     Nokia would like to compete effectively with Ericsson with their Global Services arm, and would make Core networks, IP (to do a lot of homework here with ALU’s arm to have a cohesive story) and Transport networks to be their contribution to the merger and have ALU bring in expertise through the future areas with high potentials highlighted above and their RF, wireless and optical product lines.  If these two European entities combine and integrate well, they can be a formidable company going forward.

    Convenience and availability must not be the force to drive any mergers or acquisitions, but must be a carefully thought-out process, both on the strategic front and also on the execution front on the merged product lines.  If I make a comparison to the world of Tennis, the top two singles players combining to play doubles will not make them the best doubles pair.   The markets they want to operate in, the areas where there are potentials upticks that they need to invest, the ‘cash cow consolidation’ wherein what is making money  today can be combined to partly pay for the future,  and the technologies that can give them that extra push are the main thrust areas to look into before any mergers happen. 

     Telecom , per say, is a highly capital intensive segment, and with the huge payments done by the Operators to acquire spectrums, they would have little in terms of investing for the future by buying newer technologies offered by these telecom infra company .   Adoption of newer 5G or Nanocore technologies esp., in the emerging markets is going to be slow.