And you might be able to thank the French government for enticing Nokia into acquiring the entire company.
That’s the story told to Mike Genovese, an analyst with MKM Partners. And it could explain why Nokia’s offer of €15.6 billion ($16.6 billion), announced Wednesday morning, wasn’t higher.
The deal “is about a dollar per share less than what I thought it would go for,” Genovese says. And he’s not alone; Alcatel-Lucent shares tumbled — down 87 cents (17.7%) to $4.06 on Wednesday — to better match the deal price. (Reuters reports that the lack of any cash in the all-stock offer disappointed some traders as well.)
What Genovese has heard is that Sprint — one of Nokia’s two big U.S. customers, along with T-Mobile — was the catalyst for the deal. The carrier offered to hand future network upgrades to Nokia exclusively, provided the Finnish networking giant could wrangle an acquisition of Alcatel-Lucent’s wireless business, Genovese says.
Alcatel-Lucent CEO Michel Combs has confirmed that Nokia first offered to buy the wireless business — as reported by French publication Les Echos reported earlier this week — and that AlcaLu refused.
But then, Genovese has heard, the French government stepped in — possibly this week — with an offer: Buy all of AlcaLu, and you’ll get a deal on the price.
Alcatel-Lucent officials declined to comment, as did a U.S. Nokia representative. (A query to Nokia in Finland wasn’t returned by press time.)
Sprint is offering no comment beyond a prepared statement: “Both Nokia and ALU [Alcatel-Lucent] are valuable network infrastructure providers for Sprint and we look forward to learning more about the transaction and working closely with them on any necessary transition once the deal is completed.”
It’s worth noting that not everybody finds the price so shocking. At 1.2 times AlcaLu’s revenues for the past four quarters, it’s not far off the mark from the valuations of Ciena or Ericsson — 1.4 times trailing revenues in each case, according to Gartner analyst Frank Marsala.
Nokia Joins the Champions League
In any event, Nokia is now prepared to swallow all of Alcatel-Lucent, promising limited French layoffs as a concession to the French government. With 114,000 employees post-acquisition, Nokia would rival Ericsson and Huawei in sheer size.
“They’re trying to build up a contender for the European Champions League. I guess they want to take on Ericsson in the final,” Genovese says.
Ericsson doesn’t have to match Nokia’s ante, but given the networking industry’s “copycat” tendencies, it wouldn’t be surprising, Genovese says.
“My experience with this is that Ericsson is going to buy something,” Genovese says. “I don’t think Ericsson wants to buy Juniper. I think Ciena makes more sense.”
In fact, Ericsson’s partnership with Ciena might have been the prologue to an Ericsson-Ciena acquisition two or three years from now, Genovese says. If so, the Nokia deal might shrink the timeframe closer to one year, he adds.
The Juniper theory is popular because even though Ericsson acquired a router line with Redback Networks, Juniper’s router portfolio market share closer to Alcatel-Lucent’s.
Unified communications could be another acquisition target for Ericsson, elevating the company from providing vanilla voice-over-LTE (VoLTE), says Akshay Sharma, an analyst with Gartner.
Another Big Merger
Alcatel-Lucent is, of course, the product of Alcatel acquiring Lucent in 2006, a deal that you could say worked out in the end. But it took years of struggling to get there.
The Nokia/AlcaLu pairing would be another combination of big companies, but it wouldn’t create the same headaches, Genovese says.
“Outside of wireless infrastructure, there isn’t any overlap. Everything in routing, optical, and access is incremental to Nokia,” Genovese says. “This isn’t as messy. It’s not just consolidation, because consolidation is only in the wireless part — it’s building an end-to-end company,” Genovese says.
The two vendors do share common customers here and there. Both are being used by Verizon for VoLTE, Sharma points out. But they’re geographically dispersed, he adds. Alcatel-Lucent does a lot of business in North America, while Nokia has strongholds in Scandinavia (duh), Latin America, and, through Softbank, Japan.
Moreover, Nokia and Alcatel-Lucent both appear to be on the upswing.
“The buzz is back at Alcatel-Lucent. You could even argue the buzz is back at Nokia,” Sharma says. “Two or three years ago, it was all about layoffs. Both Rajeev [Suri, Nokia’s CEO] and Michel [Combs, AlcaLu’s CEO] have done a good job turning the ships around.”
“Alcatel’s got a lot of good stuff going on right now,” Genovese says. That includes an undersea-cabling business that might go public and the router division, which has begun expanding into core networks.
“Nuage Networks is awesome. I do think Nuage is kicking Nicera’s butt,” Genovese says. (Nicira is owned by VMware.)
Amusingly enough, the acquisition would bring Nokia full circle. Through the Nokia Siemens Networks joint venture, Nokia had owned access-network equipment, which was sold to Adtran, and optical transport equipment, sold to the entity that became Coriant. Both deals closed in 2012 — but with AlcaLu, Nokia would get back into both of those businesses.
“Before, you had an era of diversification,” Genovese says. “Now you have them buying wireline assets.”