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'No politics, no nonsense': Can Nokia and Alcatel-Lucent put the past behind them with €15.6bn merger?

Two titans of the networking world are looking to a merger to give them a fresh chance to tackle the ever-changing world of telecoms.
Written by Jo Best, Contributor

Both Alcatel-Lucent and Nokia have a rocky few years behind them - a restructuring for the former, difficult integration and a sizeable divestment for the latter. With the pair now planning a €15.6bn merger, the companies claim they have learned the lessons of the past.

"I am convinced that is a powerful project with long term value creation for each different stakeholder," Michel Combes, CEO of Alcatel Lucent, said. "This is the right combination at right time. It's an unparalleled opportunity to create a European champion with... real reach over the planet."

The company - which will be called Nokia - may be a European champion, but one that's seen more than its fair share of difficulties of late. Alcatel-Lucent comes to the deal only two years out from facing bankruptcy, a situation that saw it put in place a restructuring plan known as 'Shift'. The Shift plan's first job was to shore up the company's balance sheet, improve operational efficiency, and dispel the threat of bankruptcy. While the plan is not yet complete, Alcatel-Lucent has returned to positive cash flow for the first time in a number of years.

Nokia has seen its own upheavals: difficulty making headway in the smartphone market saw it sell off its handset division to Microsoft, and prompted several rounds of redundancies. The spectre of its last major networks move - the NSN joint venture with Siemens that Nokia later bought its German rival out of with the loss of over 8,000 jobs still looms large in its corporate memory.

Both companies now claim to be aware of the challenges ahead, thanks to those experienced in the past.

"I have been part of the learnings [from NSN], good and bad, so I understand exactly what not to repeat in terms of mistakes. We're going to try and hit the ground running," Nokia CEO Rajeev Suri said. On Friday, the company will begin setting up its integration steering board and "then we will have the management team separate from that, focusing on today's business, so as we're not distracted."

"I would say both Alcatel-Lucent and Nokia Networks have been much stronger in the last two years in establishing the right governance models and the right operating models to win in the marketplace, as opposed to the last seven, the first five of those years have been quite difficult."

"Governance is clear, this is not a JV, it doesn't have conflicting situation in the board... it allows us to have no politics, a no nonsense approach to running the business," he added.

Suri said not long after he was appointed to the role of CEO that he was taking a cautious approach to larger acquisitions. So what's changed?

Learning from the past

According to Suri, as well as a transition to the cloud, there has been a period of consolidation in the mobile market which means Nokia had to strengthen its fixed-line business.

There have been €230bn of deals in 2014 - and eight of ten top operators extend across mobile, fixed and other businesses, the CEO said. "It's a converged market, something like only 30 percent of operators are pure-play mobile only," Suri told investors today. "We needed to have a strong position in fixed."

And that's where Alcatel-Lucent comes in. Post-merger, the company expects to be the number one player in fixed broadband and LTE, and the number two in IP routing, and carrier and IP licensing behind Ericsson. As a merged company, says Suri, the pair's addressable market will rise by around 50 percent, from the €84bn that Nokia could reach on its own to €130bn for the combined company, leaving the business with "a strong growth profile".

"The demands being placed on the networks of the future are increasingly complex - the demand for seamless and ubiquitous access combined with ever-increasing requirement for network analytics and network intelligence," he said.

As well as creating a business with greater presence in both fixed and mobile networking, the pair are claiming to be a good fit due to their lack of geographical overlap. Alcatel Lucent for example has a greater presence in the US, while Nokia has more of a foothold in China and Asia Pacific.

The discussions between the two companies began in 2013, around the time the process of selling Nokia's handset business began.

Scope not scale

The decision was spurred by "our emerging vision of the programmable world. This world a combination of the Internet of Things, massive cloud-based analytics, and the ability to affect changes in the real world based on the results of the analytics. To lead in this programmable world, one needs to be a master of multiple domains from macro radio, wi-fi, small cells, fixed-line, to IP routing, while at the same time seamlessly managing the service experience," according to Timo Ihamuotila, Nokia's CFO. The merger was driven by "scope not scale" - Nokia had a good position in mobile broadband, Ihamuotila said, but did not have the scope to cover all the other necessary technology areas.

The merged company is expecting to cut interest payments by €200m by 2017 and reduce operating costs by €900m by 2019, thanks to lowering spend in areas like overheads real estate, IT, admin, and other overheads, as well as trimming back on overlapping sales efforts and improving procurement.

Suri confirmed there would be redundancies as a result of the merger, but declined to detail how many or which areas may be affected.

Together, Nokia and Alcatel will have €7.4bn in net cash and its annual revenues for 2014 would be around €26bn.

The merger will see Nokia offer 0.55 Nokia shares for each Alcatel Lucent share, valuing the French company at €15.6bn.

The merger is expected to close by the middle of next year, pending regulatory and shareholder approval. The joint company will be headquartered in Finland while France, where Alcatel-Lucent is based, will become a hub of security and 5G research.

The combined company will have 40,000 R&D staff, 35,000 of whom are software engineers, with research efforts costing around €4.7bn annually. Suri said the company intends to add to that capability in the future. However, it's still possible some areas may be targeted for cuts - wireless R&D for example, where both companies have their own separate research efforts.

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