The wireless infrastructure business has had more than its share of deals looking to ‘tie two rocks together to see if they float’. Alcatel and Lucent, Nokia and Siemens ‘ and now, reportedly, it could be Nokia and Alcatel. The Finnish company is just getting shot of its ailing handset business and its infrastructure partner, Siemens. But rather than focus its energies on building up its newly rejuvenated networks business, neatly renamed Nokia Solutions and Networking, it is said to be interested in splashing some of Microsoft’s cash on a deal with Alcatel-Lucent.
Sources told The Wall Street Journal that a deal with ALU is one of several options being considered by Nokia now that NSN is set to be its main business. Outgoing CEO Stephen Elop indicated, when Siemens exited the joint venture, that a new partner might be sought. However, ALU would be a problematic one, given its string of bad results and its ongoing painful restructuring. A full merger is unlikely, however, and Nokia is more likely to be interested in acquiring just the wireless activities, to increase its scale in order to compete with Ericsson, since NSN recently refocused entirely on mobile infrastructure.
ALU’s own turnaround efforts remain some way behind NSN’s in terms of tangible results, though new CEO Michel Combes has set out an ambitious roadmap, the Shift Plan. As well as continued cost cutting, this involves streamlining ALU’s business units to rely on two main areas ‘ IP networking to generate most of the growth, and broadband access, whether wireless or wireline, for cash. That is very different from NSN’s own recovery plan, which also saw the firm narrowing down its businesses, but with its own focus being on mobile broadband.
In other words, NSN has turned itself into a specifically mobile player, which has some risks in the increasingly converged IP world, but plays to its main strengths while allowing it to build a differentiated next generation offering around flexible and software driven networks. Taking on a merger just as it starts to deliver sustainable profits, and as it comes up with a clear, focused plan, would risk putting NSN back to square one, especially given its poor track record, and that of ALU, in managing a merger.
That is why Nokia might just buy ALU’s wireless activities, to bolster NSN’s scale and narrow the gap with Ericsson and Huawei, while keeping it firmly within its mobile broadband remit. That would have some logic, especially as the two firms have taken similar approaches in some areas ‘ for instance, ALU’s lightRadio deconstructed RAN is comparable to NSN’s Liquid Radio, and both platforms can support emerging Cloud-RAN and small cell architectures as carriers stumble towards the HetNet.
However, it would be harder for ALU to unpick the elements of its business after it has spent several years combining R&D and platforms across wireline and wireless IP. Its wireless division accounts for a lower percentage of its total revenues than Ericsson’s or NSN’s, and the firm, despite striking launches like lightRadio, has faced its biggest challenges there ‘ previous CEO Ben Verwaayen was expected to offload the mobile business when he devised his own turnaround strategy, so perhaps his successor will finish the job. Combes’s plan certainly downgraded the importance of RAN activities, compared to IP transport, platforms and services, and the product carrying the highest hopes of an ALU recovery is the router family, not lightRadio.
‘Wireless tie-up makes industrial sense,’ said Bank of America Merrill Lynch analyst Didier Scemama in a client note, but a broader alliance could support a more ambitious strategy, creating a ‘highly complementary portfolio as well as perhaps the biggest patent portfolio in the communications equipment history’.
Analysts estimate that ALU’s wireless business, which had sales of about €3.4bn last year, could fetch €3.5bn in a sale, and that Nokia might be prepared to pay that price in order to gain a broader product and IPR platform. It had net cash of €4.1bn at the end of June and will get €3.79bn from Microsoft for its handset operations and a further €1.65bn for patents.
But for all the on-paper logic of NSN bolstering its own portfolio while removing a wireless rival, the timing is poor, so early in its own recuperation, to take on a troublesome acquisition. This tie-up has been rumored many times before, and reportedly talks were held last year while both firms were at a nadir in their fortunes. This will be one to keep watching, but Nokia would do well to steer clear of a major deal until it has its NSN arm established on a far more secure foothold than it has now.