Nokia Reinvents Itself (Again) with Alcatel-Lucent Deal

Nokia-dealIt’s almost a sense of déjà vu watching Nokia (NYSE: NOK) transform itself again.

What was once a sleepy little Finnish conglomerate managed to turn itself into the world’s dominant mobile phone manufacturer in the late 1990s and early 2000s. At its peak, Nokia provided 4% of Finland’s gross domestic product and 25% of its corporate tax receipts.

Then, with its management caught off guard by the rise of smartphones, it suffered a near-death experience. It ultimately sold its phone business to Microsoft (NASDAQ: MSFT).

And now Nokia is reinventing itself again – this time as a major player in the telecommunications equipment business.

Alcatel-Lucent Deal

On April 15, Nokia announced an all-share $16.6 billion deal to buy France’s Alcatel-Lucent (NYSE: ALU), another company recently laid low by stiff competition and corporate missteps.

Nokia is offering 0.55 shares of its stock for every share of Alcatel-Lucent stock. This gives Alcatel-Lucent’s shareholders 33.5% of the merged company.

The announcement capped nearly two years of talks between the two firms. It brings together two smaller network equipment makers, allowing them to better compete on a more equal footing against the two giants in the sector: China’s Huawei Technologies and Sweden’s Ericsson (NASDAQ: ERIC).

At first glance, the deal is logical. It brings together Nokia’s wireless equipment business with Alcatel-Lucent’s Internet routing technologies. It also adds Nokia’s strong business base in Europe to the many longtime client relationships Lucent established in the U.S. prior to its merger with Alcatel.

Previous Mergers Were Rocky

Nokia says the deal will be accretive to its shareholders. It says the newly combined company will address a market that is 50% larger than its current base in the mobile broadband market.

But there are big question marks surrounding the deal. In fact, after the merger announcement, Nokia’s stock fell.

The previous merger which brought Alcatel and Lucent together was rocky to say the least. Nokia’s merger with the telecom equipment segment of Siemens AG (OTC: SIEGY) was no smoother.

Alcatel-Lucent hasn’t generated positive free cash flow since 2005. And the value of its stock fell by about 80% in the eight years after the merger. A major factor in the slide of Alcatel-Lucent was the culture clash between the differing French and American management styles of Alcatel and Lucent.

Nokia, meanwhile, struggled to integrate the Siemens business, with Siemens eventually throwing in the towel and selling its stake to Nokia. The good news is that Nokia CEO Rajeev Suri now seems to have operations under control. The company has returned to profitability and the stock is up roughly 200% since its low in 2012.

The recent fall in Nokia’s share price is likely due to fears that Suri may now have to pull off a nearly impossible trick: integrating four (or at least three) separate companies into one cohesive unit.

Outlook

What is the outlook on the Alcatel-Lucent deal?

On the plus side, it brings together Nokia’s strength in mobile broadband with Alcatel-Lucent’s strength in fixed broadband. Not to mention it adds geographic diversity to Nokia’s portfolio.

And unlike the past troublesome deals, this deal is a straightforward one. It is not a merger of equals. Nokia management will be running the show.

But questions remain about cost synergies. I’m sure some Nokia shareholders are wondering why the French government, which is normally opposed to large takeovers, gave such a quick OK to the deal.

Perhaps the government approved the deal so quickly because Nokia agreed to “ring fence” both jobs and the research facility in France. This brings into question the supposed 900 million euros in cost synergies the merger is said to bring.

Rajeev Suri has had a great track record so far. But don’t expect miracles. This takeover will take several years to bear fruit. Shareholders will have to be patient.

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Published by Wyatt Investment Research at