Nokia, AlcaLu Leapfrog Huawei
Nokia Corp. bid to acquire Alcatel-Lucent in a $16.6 billion deal that would create the world’s second largest provider of telecommunications systems. With about $28 billion in revenues, the combined companies would leapfrog China’s Huawei, the current second place vendor, but still fall behind Ericsson.
The merger anticipates savings of about a billion dollars a year by 2019. In a conference call, executives said the savings would come in part from eliminating overlapping products, sales and administrative staff and wireless R&D as well as lower real estate costs and better purchasing clout.
“There will be a lot of redundancies on the wireless side from an engineering perspective,” said Stefan Pongratz, a wireless analyst with Dell’Oro Group.
Part of Nokia’s rationale for the merger is to broaden its base beyond the radio access systems where it is strong but the $35 billion annual market is declining about one percent on a compound basis through 2019, according to Dell’Oro. By contrast the $13 billion router market where Alcatel-Lucent is strong is rising about three percent through 2019, Pongratz said.
“Nokia has done a very good job turning around the company in the past few years…but with its cost cutting efforts coming to an end and radio-access systems in decline, it needed to increase its addressable market,” he said.
“It’s a smart move,” said Alam Tamboli, router and broadband analyst with Dell’Oro.
Nokia lacked Alacatel-Lucent’s routing and optical platforms that are doing well in the market. AlcaLu is ranked second to Cisco and ahead of Juniper in overall routers, largely on the strength of its edge routers though its small core router business is growing rapidly, said Tamboli. Indeed, AlcaLu reported record router revenues in its last three quarters, he added.