Following a trend I predicted in March 2015 (Intense market transformation and consolidation will be among the key 2015 wireless market features) Nokia recently announced it bought the French networking supplier Alcatel-Lucent in a deal valued at $17bn (€15.6bn). The combined company will be called Nokia Corporation, headquartered in Finland, with Rajeev Suri, continuing to serve as CEO.
The company’s goal is to “create the foundation of seamless connectivity for people and things.” Nokia plans to establish a €100m fund to invest in Internet of things startups in France following the closure of the deal, which is expected toward the end of the 2015, that is if there are no serious delays.
Alcatel-Lucent propelled by its successful growth in core networking and routing, was ranked No. 2 in edge routers in 2014 behind Cisco. The new Nokia will definitely take advantage of that position as this core networking unit will add a large percentage to the company’s total revenue. In addition, Alcatel-Lucent has managed to put together a serious wireless partner “ecosystem”, especially for metro and small cell requirements.
Alcatel-Lucent is also poised to capitalize and lead on new technologies such as 5G as the company is exploring a new air interface on the Filtered OFDM, and its strategic small cell partnership with Qualcomm could be possibly expanded to enhance its future radio access portfolio.
Complementing this ecosystem is Nokia’s Flexizone and Flexi Radio, which covers macro and small cell layer in addition to virtualization, as the company has virtualized most of its core, RAN, as well as delving into NFV alternatives. Nokia also brings strategic partnerships with Dragonwave (mobile backhaul) and Juniper Networks (IP/routing) to the table.
However, the companies do face obstacles common in all mergers. The difficult points in this deal will be staff and product harmonization, especially related to existing customers. The company will have to deal with issues such as orchestration of product overlaps, multiple business partners (internal and external), LTE customers’ relations, and common management across USA, Europe and China. All of which could shake up the global market for quite some time.
Competitors, naturally, are digesting the impact of this gigantic deal but also realize that to stay competitive they will need to adjust their strategies as well as introduce new products as more intensive competition is anticipated across all sectors. Historically, Ericsson is used to that pressure, but this case is definitely unique and more challenging; NokAlu is expected to become a global leader in ultra-broadband, IP networking and cloud applications, has raised this competitive bar.
Investors should closely follow the new company’s milestones and stock as undoubtedly there will be many upturns and downturns before the company stabilizes. The core networking segment is a high-margin, strong performing one that should add and increase the value of NokAlu’s stock. Today, if we benchmark Nokia and Ericsson’s stock, there has not been much volatility during the past year, but there is a respectful gap in the value per share. But this merger could be a game changer.
Once the merger and its accompanying issues have been address and processes, policies staff, etc., are integrated, Nokia will be strongly positioned with a highly efficient and complete end-to end portfolio across all sectors to capture 5G global contracts. With 5G expected to be multidimensional very few vendors with innovative product portfolios will be able to comply and implement providers’ demands but with this merger Nokia will.