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 In a joint announcement, the Finnish and French companies said they
were in "advanced discussions" on a "full combination, which would
take the form of a public exchange offer by Nokia for
Alcatel-Lucent." The two, which have been seen as a possible
combination for the last several years, cautioned that the
discussions could still fall apart.
Shares in Alcatel, a group worth about 11 billion euros based on
Monday's closing share price, rose 14 percent. Shares in Nokia,
worth about 29 billion euros, fell as much as 7 percent in morning
trade before paring back losses to decline 3.8 percent in the early
afternoon.
The pair are a good fit in terms of products and geographies, and
bulking up would help them cut costs as they try to compete with
mobile market leader Sweden's Ericsson and low-cost powerhouse
China's Huawei.
Nokia would expand its presence in the key United States market
where Alcatel-Lucent is a major supplier to operators AT&T and
Verizon, and get access to the French firm's fast-growing,
profitable Internet routing business.
But the track record of mergers in the industry is spotty, in part
because of the difficulties of cutting costs in a R&D intensive
business where companies cannot simply drop products that global
telecom operators rely on.
The last round, which gave birth to Alcatel-Lucent and combined
Nokia's networks business with Siemens about a decade ago, saw both
firms destroy value and lose market share as rivals went on the
attack while they were busy integrating the businesses.
The French government may also step in to protect jobs in what is
seen as a critical sector for the national economy. Nokia Chief
Executive Rajeev Suri and Alcatel-Lucent boss Michel Combes were
expected to meet French President Hollande on Tuesday afternoon.
A person at the Economy Ministry said the government wanted more
information about the rationale behind the deal and whether it could
create a European champion, as well as the impact on French
employees.
In May last year France beefed up its power to block foreign
takeovers, extending a 2005 law on defense and other industries to
the telecoms sector along with energy, water, transport, and health.
The move came as then economy minister Arnaud Montebourg battled
with U.S. conglomerate General Electric over its plans to buy part
of engineering group Alstom .
Alcatel-Lucent has around 6,000 employees in France out of a total
of 52,000 worldwide. Nokia has almost 62,000 employees.
Christophe Civit, a union representative at Alcatel-Lucent,
expressed mixed feelings about the possible takeover.
"The future of Alcatel-Lucent would be assured but our biggest fear
is the future of our R&D in France since it develops products in
direct competition with Nokia," he said.
The joint statement came in reaction to media reports that the two
had revived tie-up talks that have been on and off for years in an
industry that is seen by investors and sector executives as in need
of further consolidation. The reports had focused on the idea of
Nokia buying only Alcatel's mobile unit, which would be a simpler
deal from a political and operational point of view.
Nokia buying Alcatel-Lucent would transform the competitive dynamics
in the telecom equipment industry, which has already been through a
long price war sparked by the rise of low-cost Chinese players
Huawei and smaller cousin ZTE Corp.
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For Nokia, the deal would be a step to growing again. It sold its
flagship handset business to Microsoft Corp. last year after
mishandling the move to smartphones and being left behind by Apple
and Samsung.
In wireless, the combined group would have market share of 35
percent, compared with 40 percent for Ericsson and 20 percent for
Huawei, according to Bernstein Research.
Clairinvest fund manager Ion-Marc Valahu expressed scepticism over
the merits of the proposed deal.
"They could come up with some cost cuts, but just because you
combine one weak player with another weak player does not
necessarily mean that you will end up with a stronger player."
The combined company would have sales of around 26 billion euros,
compared with 24.4 billion for Ericsson last year and 37.44 billion
for Huawei, which also sells handsets so is not an exact comparison.
Asked on Tuesday for reaction to the deal news, Ericsson Chief
Executive Hans Vestberg said companies in the sector were all
searching for scale but added he did not foresee an immediate
challenge to his strategy.
"I will, together with management, evaluate everything that this
might mean," he said.
"A merger would mean major risks for Nokia on future costs, as they
also have to negotiate with the French government," said Mikael
Rautanen, analyst at Inderes Equity Research, who has a buy on Nokia
and does not cover Alcatel-Lucent.
"An acquisition of Alcatel's wireless division would be much easier.
But the deal would be an excellent getaway for Alcatel-Lucent from
its difficulties."
A counterbid for Alcatel-Lucent is seen by analysts as unlikely
since Ericsson would run into antitrust problems by bulking up
further, and Huawei would face strong political opposition in France
and the United States where Alcatel-Lucent is a major supplier to
operators AT&T and Verizon.
JP Morgan is advising Nokia, and boutique investment bank Zaoui & Co
is working for Alcatel-Lucent, said a person familiar with the
matter.
($1 = 0.9489 euros)
(Additional reporting by Sven Nordenstam in Stockholm, Andrew
Callus, Matthieu Protard and Jean Baptiste Vey in Paris and Sudip
Kar-Gupta in London; Editing by Sophie Walker)
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