Nokia Corporation (NOK, Financial) may merge with Alcatel-Lucent (ALU, Financial), the French telecommunication equipment maker. The merger could take the form of a public exchange offer by Nokia for the France-based company. Though talks are in advanced stages, there is no certainty as to whether the talks will actually result in the transaction, people close to the matter have said. The deal may even fall apart. Representatives of both the telecommunication companies refused to divulge any details. In the early hours of Tuesday, Alcatel's share value rose 12.6%. However, Nokia shares witnessed a drop of 6.6%.
Probable terms of merger
People familiar with this matter have also said that Alcatel's wireless assets may be bought early this week. Though talks of the entire takeover are still going on, purchasing of the wireless units seems to be on the cards. However, since President Francois Hollande's government has blocked certain mergers in the past, approval for the same is required.
Alcatel-Lucent has established a name for itself in the UK markets for its high-quality modems, routers and low-cost smartphones. The company is also the best supplier of 4G & LTE mobile networks back in the UK. Though it may not be a known fact, Alcatel-Lucent sold its shares in Alcatel Mobile Phones to TCL. Now that talks are in the advanced stage, the possibility of both the smart-phone companies entering the smart-phone sector is high. Nokia sold its smart-phone division to Microsoft Corporation (MSFT, Financial) a few years back. Nokia would benefit as their market share would increase in a significant way. Though cutting costs may not be feasible for the combined company in the short-run, it may reap benefits in the long-run. Investors are worried that the French government may oppose the transaction as they view the communication industry as a strategic one. The merger may result in job-cutting and this may not go down well with the French government. The French Economy Ministry has not voiced their opinion on this matter as yet. However, a person from the Ministry opined that the government may need more information and would question if a European champion would be created. The person also said that the government wants to know the impact of the merger on French employees. It is estimated that the combined company could make sales around $27.43 billion. This would threaten smart-phone players like Ericsson (ERIC, Financial) and Huawei, the Chinese telecommunication giant.
Equation matrix
Due to Alcatel's recent efforts at restructuring of the business focus and balance sheet, shares have witnessed a threefold increase in value. Nokia shares had also doubled after it sold its smart-phone division to Microsoft. Ion-Marc Valahu,a fund manager at Clairinvest, said that he was skeptical about the positive-effects of the deal. He said that since both the firms are small and weak players in the industry, the combination may not necessarily bring out a strong company.
Christophe Civit, a Union representative of the French company said that the future of Alcatel-Lucent would be bright after the merger, but the future of R&D in France is at stake as all products manufactured would be in direct competition with Nokia. Therefore, he expressed his positive as well as negative opinions about the proposed merger. Mikael Rautanen, an analyst at Inderes Equity Research said that this transaction could probably relieve Alcatel-Lucent from the difficulties that it is facing. Analysts have said that it is unlikely that any other telecommunication company would counter-bid for Alcatel-Lucent. If Ericsson would try to make its move, anti-trust issues would pop up. Similarly, if Huawei would counter-bid, the French political parties could oppose. This announcement is one among many other potential merger and acquisition activity in the industry.
Outcome
Though analysts are not very positive about the impending merger and still there are a lot of processes to be completed to give it a final shape. But the move will once again bring Nokia into the smartphone race. This could see a dent in a number of smartphone giant’s market shares as Nokia already had an aura in the mobile phone market earlier and if the comeback goes well then Nokia might see moderate gains in the short term while the race in the smartphone arena will further intensify.
