Business | Telecoms equipment

Engaged tone

The Nokia-Alcatel merger represents the triumph of hope over experience

|PARIS

By MS

MERGERS among telecoms-equipment makers have a terrible record. In 2006 Alcatel, a troubled French telecoms conglomerate, was pressed to merge with Lucent Technologies, a descendant of America’s telecoms colossus, AT&T. The messy result burned cash for eight years and caused its share price to tumble by almost 75%. Nokia’s experience of togetherness was hardly happier. In 2007 the Finnish firm formed a joint venture with Siemens which staggered on until Nokia bought out its German partner in 2013. So news on April 15th that Nokia and Alcatel-Lucent had agreed to tie the knot, though not unexpected, caused eyeballs to roll.

It makes sense nonetheless. Nokia is back in profit and Alcatel-Lucent is on its way there, but each firm is too small on its own to compete in the global telecoms-equipment market. This is now dominated by two firms—Ericsson of Sweden and Huawei of China.

Nokia’s and Alcatel-Lucent’s combined turnover last year was €26 billion ($34.5 billion), more than Ericsson’s SKr228 billion ($33 billion). But the merger is “primarily about scope, not scale,” says Risto Siilasmaa, the chairman of Nokia. The two firms are complementary. Alcatel-Lucent is strong in internet routers, for example, but its wireless business is small. Nokia’s wireless-networks business, by contrast, is almost too dominant: it now accounts for 88% of revenues because the Finnish firm sold its handset business to Microsoft in 2014. Alcatel-Lucent is stronger in America, thanks to its historic roots, while Nokia is somewhat more Euro-centric. They could help each other make a better fist of things in China.

Even so, there is much that could, and on past experience may well, go wrong. For a start, cross-border mergers frequently lead to culture clashes—and both Alcatel and Nokia are already coping with some queasy cultural mixes from their earlier mergers. Michel Combes, the former’s chief executive, argues that both companies are thoroughly international, and Nokia now has more French heads of business lines than Alcatel-Lucent. However, €900m-worth of operational synergies must be found by the end of 2019. And Bengt Nordstrom of Northstream, a consulting firm, worries that it will take cost-cutting to achieve these, and that this will make cohabitation trickier.

This is no merger of equals. Nokia is buying Alcatel in a straight exchange of 0.55 “new Nokia” shares for one in Alcatel-Lucent. Nokia’s shareholders will end up with 66% of the new company, and its chairman and chief executive will assume the same positions in the combined group. Its brand will be Nokia and its headquarters in Finland. Yet the French government, which on past protectionist form would have been expected to kick up rough, has given the deal a warm welcome.

That is partly because Nokia has promised not to cut any more jobs than Alcatel-Lucent was already planning to, under the recovery plan it had been carrying out before the merger was agreed. Indeed it has pledged to create a further 500 research jobs in France, and to finance digital and telecoms innovation. It is also, no doubt, because Alcatel-Lucent has had its back to the wall for so long that it is hard to conceive of any better fate for it. Most of all it reflects the French government’s ardent belief that Europe needs more digital champions on a scale to take on the world, and win.

Still, it is strange that two weeks ago Emmanuel Macron, France’s economy minister, intervened to prevent Orange, its biggest telecoms firm, from selling Dailymotion, a video-hosting site, to a Hong Kong buyer, prompting a rival offer from Vivendi, a French firm, instead. If Dailymotion is a strategic national asset it is hard to see why Alcatel, a stalwart of France’s blue-chip CAC-40 index until its recent decline, is not.

This article appeared in the Business section of the print edition under the headline "Engaged tone"

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