Nok-ing on Alcaltel's door

In the comedy film Home Alone, a child is left behind when his family goes on holiday in Europe. Nokia, the Finnish telecom equipment company, also stayed at home while its larger sibling - the mobile phone division - left for a transatlantic journey with Microsoft. Yet Nokia has performed nicely. Its share price has soared 55 per cent in the year since the split, ahead of European rivals Ericsson and Alcatel-Lucent.

On Tuesday, Nokia took another step in its newfound independence by saying that it is in advanced talks over a bid for France's Alcatel, which has an enterprise value of €12bn. The acquisition makes good industrial sense. The combined group would have estimated revenues of more than €27bn this year, equalling that of Ericsson with similar profitability. Alcatel has strength in the US and China, which account for two-thirds of sales. Nokia could use that as it sources only a fifth of sales from these two key regions.

The timing would be good as well. Alcatel, under chief executive Michel Combes, has cut costs and looked set to deliver after-tax profits this year for the first time since 2011. More importantly, this acquisition would concentrate the equipment industry from four to three manufacturers, including China's Huawei. That should reduce competition, so the deal will probably interest the competition authorities, especially in France.

And Nokia has saved up its allowance. At the end of 2014 it had a net cash position of well over €5bn, and it has made noises that it could sell its maps division, called Here. Nomura believes Here is worth €2.3bn. Alcatel, too, has a net cash position. So Nokia should be able to afford the deal in almost any combination of cash, debt and shares.

But affordability is meaningless if the deal does not make sense. As in any deal (and especially in a low-growth industry such as telecoms equipment), the success of a Nokia/Alcatel tie up will rest on any cost savings that the companies can find and the less certain benefits of improved market power. Macaulay Culkin, after all, managed to do pretty well on his own.

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