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Wireless Infrastructure Newsletter

Nokia on edge of precipice, confirming ALU talks April 14 2015


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The rumor that Nokia and Alcatel-Lucent would merge has come around many times in recent years, but the story hasn't got any more attractive with repetition. But now it is real, with Nokia confirming reports that it is in "advanced discussions with respect to a potential full combination" with its French rival.

Nokia said any deal "would take the form of a public exchange offer by Nokia for Alcatel-Lucent". The Finnish company currently has a market capitalisation of €29bn, and ALU's is €11bn. Analysts estimate that ALU could be worth €4.50 a share, or a total of €12.7bn ($13.4bn).

Of course, a deal would give the enlarged Nokia the scale that may be required to stay ahead in the pressurized telecoms equipment market. But it will also create massive integration challenges which could distract the new entity for a couple of years during a time of critical transition among carriers, in particular towards software-defined networking (SDN).

In the early stages of that new phase, Nokia looks well positioned in terms of product offering and philosophy. There seemed to be a real strategic option to move gradually away from the rapidly commoditizing hardware businesses, relying on partners for those (as it has already done in some areas like microwave backhaul and WiFi), and become a leader in carrier software - a smaller company, but a profitable one focused on the key area of investment for service providers in the later years of the decade.

But Nokia seems determined to cast off its long history of radical reinvention and cling to the 'size is all' mantra which has recently driven the network equipment sector. Combining with Alcatel-Lucent would give it combined revenues of €26bn, based on last year's performance, just ahead of Ericsson's €24.4bn.

It would see Nokia abandoning the strategy which has finally brought it to the brink of turnaround - doubling down on mobile broadband alone - since it will take on ALU's significant wireline business.

The mobile-only approach has seen the Finnish firm sell off its devices business (and possibly, according to other reports this week, its Here mapping unit). The refocus has also seen it divest many non-core businesses, as well as invest in smaller firms with technologies that will be important for the two dominant mobile growth drivers - SDN/virtualization and '5G'. Nokia has been prominent in the early development of both, moving early into software-driven network platforms under its Liquid banner, and demonstrating R&D breakthroughs in anticipated 5G approaches such as millimeter wave spectrum and massive MIMO.

The decision to sacrifice size and some revenues for profits and differentiation has brought Nokia close to recovery after years of losses and serial restructurings. Just at the moment when CEO Rajeev Suri might claim tentative victory, he seems set to throw it all away. Yes, ALU would bring Nokia greater scale to withstand the economics of Ericsson and Huawei; and most importantly it would bring the French firm's most impressive product line, its core and edge routers. That would enable Nokia to go after a wider range of service providers, as Ericsson is doing, and - importantly - to target the rising tide of convergence between MNOs and wireline operators, offering a complete portfolio without relying on partners.

But the risks and downsides are daunting. Nowhere will Oscar Wilde's aphorism, that second marriages are the triumph of hope over experience, be more apt. Both the would-be partners have come through exceptionally badly managed marriages which almost killed the bloated companies they created. The merger of Alcatel and Lucent in 2006, and the joint venture created between Nokia and Siemens in the same year (Siemens exited in 2013), have both become bywords for the wrong way to approach mergers, and they gave Ericsson and Huawei significant leeway to step into the breach and consolidate their shares. Both those deals were panic-driven, with traditional companies clinging together for warmth in an increasingly cold competitive climate, but without any clear vision of how they might evolve towards the realities of the future market. Sadly, nothing different could be said of a Nokia-ALU merger.

Amid the inevitable pain of the integration process, there is real risk that the new strategies both firms have put together will be lost. Logically, Nokia's mobile broadband should fit beautifully with ALU's approach. Under CEO Michel Combes, the French firm has, like its suitor, divested many units. It has drilled down on all-IP infrastructure plus SDN for growth, and on access (including mobile) for cash. On the wireless side, it generated €5bn in revenue last year and has a stronger US base than Nokia. These roadmaps seem complementary, but it is very doubtful that such new and therefore fragile strategies will be well combined by two still-traditional firms which are only just emerging from traumatic restructurings.

Nokia shares fell by almost 7% in Helsinki on its statements, but ALU's leapt by 14% in Paris, perhaps reflecting that investor confidence in the Finnish firm, especially since it addressed its cash shortage via the Microsoft deal, is higher than in ALU, and therefore the risk of a reversal of fortunes is higher.

One critical factor is how profitable a combined company could be in the short term. There would be medium term economies of scale, presumably including further large-scale cutbacks, but both have only tentatively returned to the black in the past year so the short term outlook is hard to predict. In 2014, Nokia's operating profit was €170m (its net profit was €1.2bn thanks to tax benefits), while ALU achieved an operating profit of €572m but a net loss of €83m. By contrast, Ericsson had an operating profit of SKr16.8bn (€1.8bn) and net income of SKr11.1bn.

As well as profit considerations, there will be significant regulatory review which could include intervention by the French government, which is very reluctant to see national businesses sold off. The balance of power between the French and US elements of Alcatel and Lucent was a complicating factor back in 2006 (the insistence that CEO Pat Russo should be based in Paris was blamed for weakening ties to key customers like Verizon, for instance). France may have moved on from former president Chirac's comments that Finland has the worst food in the world, but the administration of Francois Hollande will certainly scrutinize any bid for ALU carefully and has a track record of trying to block corporate mergers. Alcatel traces its roots back to 1898 and has been a flagship French firm, though it was privatized in the 1980s.

$1bn China Mobile deal injects new confidence into ALU April 01 2014

By the Maravedis-Rethink RAN Service team

The patience of those who kept the faith with Alcatel-Lucent is starting to be rewarded after more than eight years of one of the stormiest marriages in technology. However, behind the recurrent losses, the management dramas and the endless rounds of cuts and reorganizations, ALU has been playing some highly strategic long games. Several of these have fed directly into a huge $1bn, one-year contract the firm has announced with China Mobile - a deal which goes some way to justify the focus on converged IP and virtualization, in particular.

The deal is to "provide technology that will move the world's largest mobile service provider to an all-IP ultra-broadband network paving the way for future network functions virtualization (NFV) and cloud-based services", said the official statement. Technologies involved will include lightRadio distributed RAN units for TD-LTE overlay, evolved packet core elements, IP routers, optical transmission systems such as OTN 100G, fixed broadband access technology based on GPON, and professional services.

Of course, every vendor will hope that China Mobile, with its huge wireline and LTE expansion programs, will be a savior this year. In the carrier's recent financial results call, its capex forecast for the year was RMB225.2bn ($36.3bn) came in about $3bn ahead of analyst expectations, with much of that being driven by TD-LTE. The operator gained its commercial licences late last year and can now offer full services on its 'trial' network as well as expanding it rapidly. ALU has about 11% of the current TD-LTE awards (about the same as Ericsson, with NSN having 14% and the rest going to Huawei and ZTE). Its aim will be to increase that percentage, and the way to do that will not just be about TD-LTE base stations, but taking a far more strategic role in China Mobile's famously radical network strategies.

This is clear in this latest award, which is not about the LTE RAN but speaks to the close collaboration ALU has with China Mobile in the area of virtualization, particularly Cloud-RAN. The world's largest mobile operator - flush with fiber and with an almost greenfield willingness to leapfrog other carriers on the back of new architectures - is the biggest flagwave for C-RAN, and ALU has enjoyed a seat at the top table in the intensive R&D around the platform.

More immediately, this large contract helps vindicate ALU's decision to focus on a converged platform built around wired and wireless IP. In its recent restructuring, initiated by former CEO Ben Verwaayen and executed by current chief Michel Combes, it resisted calls by some shareholders either to spin/sell off the mobile unit, which has lower market share than the company as a whole, or conversely, to emulate NSN and focus very specifically on mobile broadband. The latter would have been foolish, given that ALU's core current strength is in IP routers, but the former looked feasible.

However, Combes's team have kept the faith that, as carriers increasingly move to converged quad play platforms, they will want converged suppliers, and that thinking is clearly seen at China Mobile. The frame agreement is worth $1bn over just one year, and so should have a significant impact on short term performance, a fact which sent the French giant's shares upwards on Thursday. Neatly, the announcement coincided with a visit to France by Chinese president Xi Jinping to commemorate the fiftieth anniversary of French-Chinese diplomatic relations.

At last month's Mobile World Congress, ALU and China Mobile demonstrated Cloud-RAN and NFV, and the vendor also supplies many elements to the cellco including its lightRadio distributed base stations, to support the TD-LTE overlay roll-out, small cells, and evolved packet core elements. The two companies co-developed the lightRadio MRO (metro radio outdoor) unit for TD-LTE.

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