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Summary

Speculation about a possible merger between Nokia and Alcatel-Lucent resurfaced last month amidst rumors that the two equipment vendors had resumed talks about closer collaboration. Markets responded positively, boosting the value of shares in both companies despite widespread doubts as to whether these latest unconfirmed discussions – in what has been a long-running saga – might finally produce a tangible outcome.

The vendor landscape is changing

It is no secret that Nokia is on the lookout for partnerships and acquisitions that can extend its capabilities into new market segments – including cloud, software-defined networking and network functions virtualization (SDN/NFV), and public safety – and that it is financially well-placed following the sale of its devices business to Microsoft in April 2014. Yet the scale of a full merger with its Franco-American counterpart would be a daunting undertaking.

Nokia’s challenge is to sustain its recent strong performance in a relatively stagnant market where mobile broadband is becoming just one aspect, albeit a key one, of a much broader and converged ICT landscape. While the operator sector seems to be consolidating along converged fixed-mobile lines, Nokia has only a wireless portfolio. To this extent the merger rumors are interesting.

Alcatel-Lucent’s mobile broadband offering has limited appeal due to the vendor’s lack of a legacy wireless business. In attempting to address both the mobile and fixed markets, Alcatel-Lucent risks overstretching its resources and limiting its capacity to develop new technologies.

The vendor landscape is polarizing between market leaders Huawei and Ericsson and much smaller specialist suppliers, with Alcatel-Lucent and Nokia currently occupying the uncertain center ground. A merger between the two would have significant benefits but also major challenges.

Pros and cons

So why might a merged Nokia/Alcatel-Lucent make sense?

  • Nokia’s strengths in mobile broadband, OSS, global services, and mapping technology are a good fit with Alcatel-Lucent’s fixed network business (especially core network and IP routing) and developing SDN/NFV capabilities.

  • The combined company would challenge the growing dominance and market share of Huawei and Ericsson, instantly becoming a top three vendor and moving into the number two RAN supplier spot.

  • The merger would strengthen Nokia’s position in North America and China – two of its key markets.

  • The merged company would be well placed to meet the demand for converged network solutions among operator customers at a time when the operator sector is consolidating along converged fixed-mobile lines.

  • Together the two companies would be better equipped to extend beyond their traditional markets and create new revenue streams in areas such as enterprise.

What are the risks?

  • A full merger would plunge both businesses back into a period of introspection and restructuring, immediately following (or in the case of Alcatel-Lucent, in the midst of) major business reorganization programs.

  • A full merger would create significant duplication in areas such as mobile broadband and small cells. Maintaining two different product portfolios and servicing existing customers would counteract the benefits of increased scale.

  • Rationalizing the two product lines would be difficult, and dealing with French labor laws could limit what Nokia would want to do (witness the French government’s pushback on Alcatel-Lucent CEO Michel Combes’ programs under the Shift Plan).

If the two companies decide that the longer-term benefits of increased scale outweigh the associated risks, they will embark on a large and unwieldy undertaking. Initially some exploratory form of collaboration that provides a more compelling offer for customers would be the low-risk option, and one that might prove more attractive.

Appendix

Author

Julian Bright, Senior Analyst, Intelligent Networks

julian.bright@ovum.com

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