Nokia will revamp its operations with the largest corporate acquisition in the economic history of Finland.

The manufacturer of network equipment on Wednesday announced that it will acquire its French rival Alcatel-Lucent in a 15.6 billion euro all-share deal and confirmed that it is exploring the sale of its mapping and location unit, HERE.

The takeover is significant also in France, as evidenced by the fact that the chief executives of both companies presented its details to François Hollande, the President of France, on Tuesday.

Nokia may require the proceeds from the sale of HERE to take control of shares in Alcatel-Lucent in the event that not all shareholders approve of the terms of the public exchange offer. The network equipment maker has offered shareholders 0.55 shares in the combined company per each share in Alcatel-Lucent.

Altogether, 33.5 per cent of shares in the combined company will be in the hands of Alcatel-Lucent shareholders after the scheduled completion of the takeover early next year.

The takeover entails considerable risks for Nokia as consolidating two major corporations can prove unexpectedly difficult and painstaking. On Wednesday, shares in Nokia fell 1.5 per cent on the Helsinki Stock Exchange and shares in Alcatel-Lucent more than 15 per cent, with initial reports suggesting that investors were unsure about the acquisition.

The acquisition will, however, allow Nokia to increase its share of important markets in the United States, where Alcatel-Lucent has a history of collaboration with the communications service providers AT&T and Verizon. In addition, it will allow Nokia to obtain new expertise and expand its product portfolio.

The needs of the clientele of network equipment makers have changed in the face of the digitisation of operations and services and the advent of cloud services and the Internet of Things. Today, communications service providers want to concentrate their network equipment acquisitions with as few manufacturers as possible.

“Communication infrastructure used to consist of distinct islands. These islands will in the future consolidate into a single entity controlled through cloud services. We need the products of Alcatel-Lucent to control this whole and to sell comprehensive solutions to customers,” said Risto Siilasmaa, the chairman of Nokia's board of directors.

Alcatel-Lucent is known particularly for its IP routers and wired network equipment. Nokia, in turn, has concentrated primarily on mobile broadband solutions and services for communications service providers.

Bernstein Research has estimated that the takeover will increase the market share of Nokia to 35 per cent, notably closer to the 40 per cent share of market leader Ericsson. The two rivals would according to the investment research firm be roughly equal in terms of revenue.

The combined firm is expected to employ roughly 11,000 people and report annual net sales of 26 billion euros.

Michel Combes, the chief executive at Alcatel-Lucent, estimated in an interview with Reuters that the takeover will likely encourage Ericsson to overhaul its product portfolio.

Combes also expressed his confidence that the takeover will strengthen the technology industry in Europe, which has failed to keep step with technological advancements due to the dominance of the United States in the field of mobile operating systems. Hundreds of firms have been consequently founded in the United States to develop applications for tablets and smartphones.

An increase in the use of applications, in turn, has imposed further demands on network performance.

Nokia and Alcatel-Lucent expect to be able to reduce costs by 900 million euros by 2019 as a result of the merger. The objective of the takeover is to reduce costs by 200 million euros, which may translate up to 2,000 job cuts. A rule of thumb in the industry is that cutting one job will reduce costs by roughly 100,000 euros.

Rajeev Suri, the chief executive at Nokia, emphasised in a press conference in Paris that any speculation on the possibility of job cuts remains premature. In Finland, Nokia operates a manufacturing plant in Oulu and employs most of its workforce in research and product development.

Nokia on Wednesday assured that its headquarters will remain in Finland, Siilasmaa will continue in his duties as board chairman and Suri in his duties as chief executive. The board of directors of the combined firm will have nine to ten members, including three members from Alcatel-Lucent, one of whom will serve as vice chairman.

Combes also revealed on Wednesday that Nokia initially approached Alcatel-Lucent with the intention of only acquiring its mobile equipment unit. The takeover bid, however, was turned down and negotiations over the acquisition of the entire company began.

Petri Sajari – HS
Aleksi Teivainen – HT