Alcatel-Lucent had been in the midst of a corporate restructuring it called the Shift Plan. It was designed to narrow the company’s focus to provide equipment for the massive move to cloud computing and the Internet of Things that’s affecting companies around the world.
Nokia has been doing some shifting of its own. In the past year the Finland-based company finalized the sale of its once-flourishing handset business and doubled down on networking equipment with its bid for Alcatel-Lucent. Nokia also has said it might sell its mapping and location business called HERE.
The combined revenue of the companies in 2014 was about $33 billion. Nokia is profitable, and that’s where Alcatel-Lucent was trending with its restructuring.
As a bigger company with a complementary array of products, it hopes to more effectively compete in the market for networks that bear increasing amounts of information from cloud computing and the delivery of Anything as a Service from data centers, the Internet of Things, and increasing amounts of video, especially on mobile devices.
“A combination of Nokia and Alcatel-Lucent will offer a unique opportunity to create a European champion and global leader in ultra-broadband, IP (Internet Protocol) networking and cloud applications,” Michael Combes, Alcatel-Lucent’s CEO said in a statement.
Trail of Acquisitions
The Nokia deal with Alcatel-Lucent is the culmination of a series of acquisitions that brought the companies to this point.
While previously known for its cell phones, Nokia makes networking equipment that carries phone signals as well as data and video and other information. After the company failed to compete with smartphones from Apple, Samsung, and others, it sold the handset business to Microsoft in 2014.
Nokia teamed up with Siemens to beef up its network equipment business in a joint venture, then Nokia bought Siemens’ share of the operation in 2013. The networking segment now accounts for 88% of Nokia’s revenue.
Alcatel-Lucent was formed in 2006 when Alcatel bought Lucent, which had been the equipment-making unit for AT&T under the Bell system. In 1996 Lucent bought Ascend Communications in a $21 billion deal.
Bucking a Trend
The Nokia-Alcatel-Lucent deal bucks the 2014 trend of companies splitting apart to better focus on specific markets. Hewlett-Packard, for example, will become two companies, probably later this year. One will focus on enterprise computing and software and the other will focus on printers and other equipment.
A merger makes more sense for Nokia and Alcatel-Lucent in an industry where scale is important. Nokia is strong in mobile broadband and Alcatel-Lucent brings strength in Internet routers and video transmission equipment. Nokia is strong in Europe and Asia; Alcatel-Lucent’s biggest market is North America. The new Nokia would have 35% market share of the global wireless network market, behind Ericsson, at 40%, and ahead of Huawei, at 20%.
The timing is right for such a deal. Nokia has pretty much wrapped up its restructuring process and Alcatel-Lucent is most of the way through its Shift Plan (its restructuring costs reached $695 million in 2014). The companies have promised regulators in Europe that they would cut no more jobs than Alcatel-Lucent had planned to.
The breadth of products the companies bring together should help it compete against Ericsson and Huawei.
But navigating the changing networking equipment business will be a challenge. Even as demand for capacity increases, carriers are trying to keep costs down by turning to software to run networks. Separately, Nokia and Alcatel-Lucent have invested research and development in software that helps run networks more flexibly and efficiently.
With the acquisition, expect more investment in Nokia Technologies, the company’s research and development segment, and Bell Labs, the research unit of Alcatel-Lucent and the descendant of the fabled Bell Labs where the transistor and other foundations of modern communication technology were invented.
Rajeev Suri, Nokia’s CEO and president, indicated as much in announcing the deal.
“Our innovation capability will be extraordinary, bringing together the R&D engine of Nokia with that of Alcatel-Lucent and its iconic Bell Labs,” he said. “We will continue to combine this strength with the highly efficient, lean operations needed to compete on a global scale.”