Tuesday, December 01, 2015

Nokia will be back. Starting from network equipment to smartphones

Nokia failed to adapt to the fast rise of smartphones and eventually sold its faltering handset business to Microsoft. Now, in an effort to remake itself once again, Nokia has turned to manufacturing the telecom equipment that powers the mobile networks of global carriers like Deutsche Telekom and China Mobile.

That strategy will soon face its biggest test when Nokia completes its $16.6 billion takeover of its Franco-American rival Alcatel-Lucent in early 2016.

Nokia shareholders will meet in Helsinki, Finland, on Wednesday to approve the deal. And despite some resistance, Alcatel-Lucent’s shareholders are also expected to give their support by the end of the year through a share-swap arrangement that will leave them with roughly a one-third stake in the enlarged telecom manufacturer. (Nokia shareholders will hold the remainder.)

The hurdles facing Nokia’s effort are high. The company must sidestep the checkered past of previous costly takeovers in the telecom industry that have often yielded more problems than solutions. Nokia is also confronted with tough competition. Low-cost Chinese rivals and a downturn in spending from carriers worldwide have cut growth prospects just as it edges toward its largest acquisition in years.

Yet, Rajeev Suri, Nokia’s 48-year-old chief executive, says the takeover of Alcatel-Lucent is exactly what his company needs to execute its yearslong makeover. That overhaul has included cutting more than 17,000 jobs, and the sale of unwanted assets like its digital mapping unit.

“When I took over, we were on the brink,” Mr. Suri said in a brief return to Finland between customer meetings in Asia. “Being able to pull off an acquisition that might make us No. 1, now that’s pretty exciting.”

“Through the deal, we’ll grow our relevance with our customers,” he added. “We’ll have the size to become a strategic partner.”

Analysts say both companies do offer complementary expertise: Nokia specializes in wireless networks, and Alcatel-Lucent is best known for its routers and other equipment that is used to create broadband networks.

But as carriers like Verizon Wireless and Telef√≥nica of Spain, which represent the bulk of the companies’ revenue, pull back on mobile networks investments, industry watchers remain concerned that a bigger Nokia may struggle to find new customers to offset the moribund global telecom industry. Sales, including in the United States, have flatlined.

“For Nokia and Alcatel-Lucent, it’s a matter of survival,” said Bengt Nordstr√∂m, co-founder of Northstream, a telecom consulting firm in Stockholm. “The real challenge is where are they going to find growth.”

History also offers reason for caution. Alcatel’s merger with Lucent Technologies in 2006, for example, led to corporate infighting, dwindling sales and, eventually, wholesale layoffs. And Nokia’s own joint venture with Siemens, the German industrial giant, faced many of the same headwinds, finally culminating in Nokia buying out Siemens in 2013.

“The history of M.&A. is littered with hubris,” said Sylvain Fabre, a telecom analyst at the research firm Gartner in Bristol, England. “But Rajeev and his team have a track record that could make this work.”

Ever since Nokia first announced its takeover of Alcatel-Lucent this year, it has looked to previous deals, including its lackluster partnership with Siemens, to avoid repeating past mistakes.

Jorg Erlemeier, who led Nokia’s integration team, said the deal was specifically structured as a takeover, not a merger of equals, so that Nokia executives would assume lead management roles — a way to avoid confusion over how the expanded company would be run. Mr. Erlemeier’s team, which now numbers more than 1,000 people, has met almost weekly since April, negotiating logistics, corporate structures and possible job cuts ahead of the deal’s completion early next year.

Foreign companies have also had trouble acquiring French corporate giants in the past, partly because the French government holds stakes in a number of so-called strategic assets like the energy and telecom industries. The government, for instance, initially balked at General Electric’s offer to buy the energy assets of Alstom, a French conglomerate.

The French government, however, owns less than a 4 percent stake in Alcatel-Lucent. And Nokia has guaranteed it will maintain job levels in France and has created a $105 million fund to support local tech companies, efforts that have so far tempered concerns from French politicians.

“I’m realistic; this is something that had to be done,” said Philippe Camus, Alcatel-Lucent’s interim chief executive, when asked about the pending takeover. “We’re in a global market. Not all European champions can be French.”

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