Nokia and Alcatel chiefs defend plans in face of rocky history

The chief executives of Nokia and Alcatel-Lucent have defended their plans to become a single company, arguing that the Finnish telecoms equipment maker's proposed acquisition of its smaller French rival would avoid the pitfalls of the companies' previous mergers.

Nokia's Rajeev Suri and Michel Combes of Alcatel-Lucent told the Financial Times on Wednesday that combining forces would benefit from consolidation across the mobile industry - and lead to further consolidation.

"How many operators do we have that are not converged today? It is a fixed, mobile, cable converged industry and if that is the case, we need suppliers that can solve that," said Mr Suri.

At a press conference in Paris, the two companies confirmed that Nokia had launched an agreed all-share takeover offer for Alcatel-Lucent, giving the French company an enterprise value of €15.6bn, with a view to creating a Finnish-French rival to Ericsson of Sweden and China's Huawei in the telecoms equipment industry.

The Finnish company said that it would offer 0.55 new shares in Nokia for every Alcatel share, which it said was equivalent to €4.27 a share, a 28 per cent premium over the French group's average stock price over the past three months.

Nokia's shareholders will own about 66.5 per cent of the combined business, which will remain headquartered just outside Helsinki and retain the Finnish group's name. Mr Suri and Risto Siilasmaa, Nokia's chairman, will continue in their jobs at the new company.

People close to the talks said that the two companies had been in discussion for much of the last year about a range of possible transactions. Plans for Nokia to acquire Alcatel's wireless business shifted in late January to the idea of a complete takeover, these people added.

"At some point early this year, the wisdom of the whole company became clear to everyone," said one of the people.

Mr Suri said the deal would take between nine and 12 months, and be completed during the first half of 2016 "at the earliest".

He added that the two companies were targeting €900m of cost synergies by 2019 and €200m in reduced interest expenses by 2017.

Mr Suri also stressed that France would continue to be important as "a major centre for innovation".

Mr Suri said the company expected to add several hundred new positions in research and development in the country, with a focus on new graduates. Nokia also committed to spend €100m to back French start-ups as part of the deal.

But Nokia and Alcatel-Lucent will need to convince shareholders that the acquisition will make the two businesses stronger despite their poor record for making mergers work.

Nokia experienced a difficult joint venture with Siemens, which eventually led the Finnish group to buy out its German partner's stake in the equipment business. Similarly, Alcatel went through a painful merger with Lucent of the US in 2006, with the company losing 80 per cent of its market capitalisation in the eight years after the deal.

The two companies burnt through €10bn of cash trying to make the deals work, according to analysts at Jefferies.

"The mergers of both Alcatel/Lucent and Nokia/Siemens were destructive to shareholder value for many years," said Robert Lamb, equities analyst at Jefferies, who pointed to restructuring charges as well as the performance of shares in the two groups.

But Mr Suri stressed that there was a distinction with this deal. "Previous mergers that we both had were driven out of survival and driven solely to cut costs . . . this one is different, it is really about scope first and foremost," he said.

The new company would be the world's second-biggest manufacturer of mobile equipment with about 35 per cent of global sales compared with 40 per cent in the case of Ericsson and Huawei with about 20 per cent.

In the first reaction from a Finnish politician, Olli Rehn, the former European commissioner tipped to become a minister after Sunday's parliamentary elections, told the Financial Times: "Europe needs strong and competitive companies in the face of advancing globalisation. This is important for the sake of sustainable growth and sustained employment. The creation of Nokia-Alcatel is thus a positive move to enhance Europe's competitive advantage in the critical technological field of telecom networks."

Reaction from Nokia's shareholders, however, was mixed. A top-five investor said: "It is a very good deal, especially in the long term. I understand that integration isn't easy. But there is quite a good record if you look at Mr Suri."

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If the acquisition is successful - the proposal will also have to get the approval of regulators in the US, the EU and China, among other jurisdictions - the group would be left with about 114,000 employees and revenue of roughly €26bn.

Mr Suri admitted that joint venture with Siemens had not worked out as planned. It was dogged by governance issues as well as low capitalisation levels, both of which had forced management to make compromises.

Mr Combes said the proposed acquisition by Nokia had the right timing, governance and execution - three elements Alcatel lacked when it merged with Lucent. "If you look at the A-L merger, I guess we were wrong on the three," he said.

He added that because this would clearly be an acquisition, the governance and management issues were clearer. "We said, OK, there is one company which is bigger than the other so don't pretend that it is a merger of equals just admit that it is an acquisition," he said.

JPMorgan Chase and Skadden Arps advised Nokia.

Zaoui & Co and Sullivan & Cromwell advised Alcatel-Lucent.

Adam Thomson in Paris, Richard Milne in Oslo, and Daniel Thomas and Arash Massoudi in London

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