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Nokia in ‘advanced’ merger discussions with Alcatel-Lucent

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via Flickr © Aidan Jones (CC BY-SA 2.0)

Nokia and Alcatel-Lucent are deep in discussions about a probable/possible merger. Nokia issued a brief statement today in which it said it was responding to press speculation, and that the two companies “are in advanced discussions with respect to a potential full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent. There can be no certainty at this stage that these discussions will result in any agreement or transaction. A further announcement will be made when appropriate.”

Crystal clear and a breath of fresh air for those of us mentally scarred through listening to politicians not answering simple questions in the run-up to the UK national election.

But there will be serious questions to answer about this move if it comes off: not least the ‘jobs’ and ‘national champion’ questions sure to be posed by the French government.

Back story

Alcatel-Lucent is itself the result of a cascade of mergers, spin-outs and buy-ups over nearly a century, and especially over the past 30 years or so. As a result, Alcatel, as was, has always been a hotbed of internal rivalries as it attempted to digest overlapping sets of technologies shoe-horned into the corporate structure as it bought up what were formerly national switching and transmission specialists (nearly every European country had at least one of them to supply each government-owned PTT) as Europe integrated. As the industry itself went digital through the late 1970s and 1980s the industrial logic for a ripple of mergers on the infrastructure side was clear.

Then consolidation went international with the most recent absorption, exactly 10 years ago when, in 2005 in the wake of the horrendous telecoms crash of 2001, Alcatel and US-based Lucent Technologies (originally the AT&T equipment arm), merged to form Alcatel-Lucent.

So the Nokia/Alcatel-Lucent consolidation - again, if it comes off - is just part of the general long-term pattern of consolidation - a little like one of those African lakes which are shown drying up with time-lapse photography, so that what was once a vast body of water ends up a tiny mud-hole full of dying catfish.

Most recently, Alcatel-Lucent was seen to be returning to profitability after a period of difficulty and is deemed to have made a good account of itself in the most recent technological transformation gathering pace in telecoms  - virtualisation and automation using NFV and SDN.

When the merger story broke there was speculation that Nokia might only be interested in lifting Alcatel’s wireless arm. But the statement issued today seems to indicate a “full combination” - meaning a full merger.

So what are the chances that the companies will merge and what are the potential snags?

There’s no disguising the fact that Nokia and Alcatel-Lucent are the weakest players in the space - out in front and off to the side are not just Ericsson and Huawei but new players poised to grab big chunks of the telco infrastructure business as operators gear up for a new round of investment using new technologies and architectures.

There's no question that the core network infrastructure business is due to contract even further as telcos look to use general-purpose bare metal servers to shoulder much of the network’s processing burden… not right now, but certainly in the next decade as the virtualisaton technology matures. While much is made of enabling telco agility by introducing  NFV/SDN, there is also an important underlying cost agenda at work which all adds up (or rather down) to less money proportionately being pumped into what we used to think of as telecoms infrastructure.

So long-term prospects for huge soup-to-nuts telecoms specialist vendors aren’t that great - especially with IT players such as Hewlett-Packard, Oracle, IBM and even Dell, entering the space from the data centre.

Mergers and buy-outs in this industry don’t work particularly well either. That understanding may weigh heavily on negotiations, as will the spectre of a French government, determined as always to protect jobs, even though most Alcatel-Lucent jobs are not in France.

It seems likely now that the merger is certainly on, barring government or regulatory intervention. Given the merger track-record in our business the move is unlikely to be a roaring success - these mergers never are and nearly always result short term value loss. But then the alternative - soldiering on alone and getting smaller and smaller until finally bought by who knows who - could be quite a bit worse.

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