Nokia has announced the acquisition of French telecommunications equipment firm Alcatel-Lucent for £11.25 billion ($16.6 billion). The deal puts Nokia in a prime position to vie for first place in the networking market, where Ericsson is currently leading.
It is the first acquisition since Nokia sold its mobile division to Microsoft for £4.9 billion, after years of operating losses. That money will go towards this new acquisition, but Nokia is planning to pay a split of stock and cash - it expects the deal to close by early 2016.
“The combined company will be uniquely positioned to create the foundation of seamless connectivity for people and things wherever they are," Nokia said in a statement. "This foundation is essential for enabling the next wave of technological change, including the Internet of Things and transition to the cloud. With more than 40,000 R&D employees and spend of [£3.3] billion in R&D in 2014, the combined company will be in a position to accelerate development of future technologies including 5G, IP and software-defined networking, cloud, analytics as well as sensors and imaging."
Alcatel-Lucent is the combination of a mobile phone and networking company with ties in almost all wireless and wired markets. It also has a few smartphones, although Microsoft has made agreements with Nokia to not launch any smartphones for three years.
The news comes as a surprise to many who were under the assumption Nokia had no capital. Considering it had been running on an operating loss over the past few years and lacked any major savings, it seemed like the £4.8 billion would be used to pay off debts.
The mobile division did rid them of any operating loss and Nokia has reported solid earnings since, though it might be trying considering Alcatel-Lucent is not doing well either. Nokia may shorten the workforce after the acquisition is completed.
Nokia intends to keep running with its own brand and remove Alcatel-Lucent from everything, apart from R&D.
A week ago, Nokia announced its interest in selling Here maps and all its mapping patents and technologies. These could fetch over £2.5 billion, something that could go towards the massive merger.
Networking firms might bicker about Nokia getting too much power over this acquisition, but the truth is for years Ericsson has held most of the cards in the networking market. It is high time someone was able to compete with its massive line of patents and contracts.
Nick Jones, Partner and head of technology and telecoms at Cavendish Corporate Finance, said: “The track record of large mergers in the sector hasn’t been great - the Alcatel and Lucent merger itself being an unfortunate comparable.
"With the French state protecting French jobs there’s added difficulty to yielding cost synergies, although the pooling of Nokia cash with Alcatel debt will yield more obvious financing savings.
"With integration likely to be challenging, shareholders will hope that increased scale and R&D capability will drive revenue growth from an increased addressable market for the merged business.”