ESPOO: Finnish telecoms company Nokia is to buy French rival Alcatel-Lucent in an all-shares deal that values Alcatel-Lucent at €15.6 billion (US$16.6 billion)
The Finnish telecoms equipment provider on Wednesday laid out a simpler-than-expected plan for its biggest-ever acquisition. It steered away from complicated corporate governance structures that have mired past transactions requiring the blessing of the French government, like General Electric’s convoluted deal for Alstom.
The all-share deal isn’t taxing for Nokia’s balance sheet: the two companies will have net cash of about €7.4 billion, helping Nokia’s efforts to achieve an investment grade credit rating. But Nokia has pledged to find €900 million of operating savings by 2019 to justify the deal. This could be thorny.
Telecoms equipment companies are notoriously difficult to integrate, as witnessed by Nokia itself. Its joint venture with Siemens to form Nokia Siemens Networks became such a bugbear that Nokia bought out its German partner altogether in 2013. Alcatel-Lucent, meanwhile, hasn’t recorded a full year of positive free cash flow since its 2006 merger.
Both companies have successfully restructured partly by unwinding problems from those deals. Another union of what is essentially four different company cultures threatens to halt the momentum behind those hard-won gains.
Clients also need to be kept on side as the pair start to streamline products and combine two different operating platforms. This amalgamation of technology often takes longer than expected and can outweigh the short-term benefits of research & development savings, argues UBS. Scope to cut jobs looks limited: Nokia has promised not to retrench in France, where most Alcatel employees are based, beyond what is already agreed under a three-year restructuring plan.
Nokia may be able to reach new clients, like AT&T and Verizon, thanks to a strengthened position in the U.S. But the disruption involved in other deals, including Alcatel’s, sent customers heading for the door. Taking into account the various risks, UBS estimates synergies to be closer to €520 million.
Even that, though, would be enough to cover the premium Nokia is paying in the deal. And Nokia is paying about 11 times 2015 expected earnings before interest, tax, depreciation and amortization, in line with the sector, according to FactSet. Bucking the industry’s poor record and delivering the details is now what counts.
