The union of French and Finnish networking suppliers Alcatel-Lucent and Nokia in a deal worth close to €16bn will create one of the largest networking companies in the world, with combined net revenues of about €25bn and operating profit of €300m, and will reshape the networking sector for good.
In fact, according to Forrester analyst Dan Bieler, it will become the second-largest provider of carrier-grade telecoms networking equipment in the world, just behind competitor Ericsson but substantially ahead of Huawei.
Bieler characterised the rapidly evolving telecoms market as the main rationale for the acquisition.
In a world of consolidating telcos, network-sharing, the dawn of quad-play, ubiquitous broadband, and cloud and IP convergence meant users expected more, he said.
The dawn of the internet of things and industrial internet requirements also called for rapid development of next-gen network tech and services.
“Nokia can’t cater to these emerging market demands alone,” said Bieler. “In this fast-changing world, it would be foolish and risky not to change direction as the market context shifts.”
In a blog post, Ovum’s Daryl Schoolar forecast major changes in the telecoms supplier landscape as a result.
Nokia’s management has been saying for some time that there is only really room for three big radio access network suppliers in the market, said Schoolar, and with this acquisition, it had made sure it will remain one of those, gaining strength in areas such as small cells and SDN/NFV, as well as bolstering its position with the US mobile networks, thanks to the Lucent heritage.
A history of disaster
It would be fair to say that both Nokia and Alcatel-Lucent have a terrible history when it comes to mergers and acquisitions: Nokia’s joint venture with Siemens ended unsuccessfully, its dalliance with Microsoft spelt its downfall as a mobile device business, and even now it is still trying to sell off a loss-making online mapping division.
Alcatel-Lucent, meanwhile, is a decade-long disaster. The result of a badly thought-out 2006 merger between French telecoms stalwart Alcatel and US AT&T descendant Lucent, it has limped around the market for years, losing millions and burning through CEOs as if they were going out of style, notably Patricia Russo – now lined up to become chairman of HP Enterprise – who stepped down amid a boardroom bust-up and was pilloried by Alcatel people for her limited grasp of French.
Ovum’s Schoolar said it was not a great leap of the imagination to suggest that if the Nokia Siemens Networks (NSN) tie-up and Alcatel and Lucent’s misadventure had gone according to plan, this latest deal would not have been on the cards.
Sheridan Nye, senior European analyst for ICT technologies at Frost & Sullivan, said: “The challenge is to convince employees and shareholders that cultural integration will be more effective than at either Alcatel-Lucent or NSN, both of which suffered from fragmented governance of merged companies with strong cultures and histories.”
Forrester’s Bieler added: “Nokia will need to integrate and align the portfolios and the account teams. The customer-facing nature of these areas means that any integration challenges will be noticeable by Nokia’s customers directly. This is where it risks losing customers to its rivals.”
Bieler forecast that the toughest integration challenges would be felt in the wireless space, where Nokia generates about 88% of its sales – post-handset divestment – and Alcatel-Lucent 33%.
He agreed that both companies had learned the hard way about the challenges of integration, but Nokia had emerged stronger in the past 12 months and was well-placed to apply the tough lessons it had learned.
But the French government could pose a problem, said Bieler, warning that it would “do well not to meddle too much in Nokia’s strategic direction by requesting special conditions for French operations”.
Frost & Sullivan’s Nye added: “Implementation will take time and money, and effective management will determine whether it succeeds or fails. Nokia also needs to convince competition regulators – notably in the US and China – to approve the deal, a process that could take several months.”
Marriage of equals
However, Nokia and Alcatel-Lucent appear to have created a genuinely strong marriage, said Nye, who characterised it as a merger of near-equals and said it was, on the whole, well-timed as both companies had completed the worst of their cost-cutting programmes.
It was also a defensive move to present a united front to the competition, he said. “Neither Nokia nor Alcatel-Lucent alone could realistically take significant share from market-leader Ericsson, or fight off aggressive competition from Huawei,” he said. “The merger creates a competitor that is stronger than the sum of its two parts.”
Ovum’s Schoolar added: “The new Nokia will become a very close and strong number two to Ericsson in the radio access network market. And, unlike the current number two, Huawei, Nokia doesn’t have problems selling into the US.”
He predicted more acquisitions as a result, and said Nokia’s remaining competitors could start to bulk up their portfolios in defence. He mentioned SpiderCloud as a possible target in the small cell sector.
Schoolar also said it might create problems down the line for the likes of ZTE and Samsung, pointing out that a revitalised Nokia could make it hard for them to grow their mobile business.
“Ericsson, Huawei, Samsung and ZTE should take advantage of the market uncertainty to try to grab share from both Nokia and Alcatel-Lucent,” Schoolar concluded.
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Source: Computer Weekly IT News