Nokia taps AI boom with $2.3 billion Infinera purchase
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[June 28, 2024] By
Supantha Mukherjee
STOCKHOLM (Reuters) - Nokia's bid to buy U.S. optical networking gear
maker Infinera in a $2.3 billion deal puts the Finnish company on track
to gain from the billions of dollars in investment pouring into data
centers to cater to the rise of artificial intelligence.
The deal would help Nokia to leapfrog Ciena and become the second
largest vendor in the optical networking market with a 20% share, behind
Huawei, which is benefiting from the minimal presence of Western
companies in China.
Telecom gear makers, struggling with lower sales of 5G equipment, have
been looking for ways to diversify their markets and get into growing
areas such as AI.
Nokia's move will allow the company to sell more equipment to big tech
companies such as Amazon, Alphabet and Microsoft as they invest billions
of dollars in building new data centers to service the artificial
intelligence boom.
"This is pretty optimal timing for a deal of this nature when you are
timing it just before the market is expected to start to recover," Nokia
CEO Pekka Lundmark said in an interview with Reuters.
"AI is driving significant investments in data centers ... one of the
key attractions of this acquisition is that it significantly increases
our exposure to data centers," he said.
Data centers use optical transport networks - cables made of glass that
transmit digital signals - to allow electronic devices to talk to each
other.
Infinera is especially strong in intra data center communications, which
refers to server-to-server communications inside data centers. This will
be one of the fastest growing segments in the overall communications
technology market, Lundmark said.
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Nokia shares rose 4% in morning trade, signaling that the
shareholders are bullish about the deal. The share price of buyers
would typically ease due to dilution in a cash-and-stock deal.
Nokia, which will pay 70% of the purchase price in cash and the rest
in stock, expects to save 200 million euros ($213.88 million) in
costs following the deal's closure next year.
While the purchase multiple may be somewhat steep as Infinera had a
lumpy growth trajectory, if Nokia could extract the 200 million
euros in synergies, then the purchase price would be justified, said
Mads Rosendal, analyst at Danske Bank Credit Research.
Infinera gets about 60% of its business from the United States,
while Nokia had a bigger share in Europe and Asia, making it a
complementary transaction, said Lundmark.
"The two businesses together have combined cost of sales of over 2
billion euros and operating expenses of over a billion euros ... so
against that target, 200 million (euros) is not a particular
stretch," Lundmark said, adding that it was too early to comment on
potential layoffs.
($1 = 0.9351 euros)
(Reporting by Supantha Mukherjee in Stockholm; Editing by Ros
Russell)
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