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NSN, Alcatel-Lucent - once bitten, now merger shy
August 25, 2009 / 12:33 PM / in 8 years

NSN, Alcatel-Lucent - once bitten, now merger shy

PARIS/HELSINKI (Reuters) - As top mobile network equipment firm Ericsson snaps up bankrupt Nortel’s assets, its smaller rivals need to combine to provide a real challenge, but painful recent mergers are likely to blind them to that logic.

On paper, a merger of struggling Nokia Siemens Networks NSN.UL and loss-making Alcatel-Lucent ALUA.PA -- the number two and four manufacturers of mobile network equipment in terms of market share -- would make a lot of sense. The firms would gain economies of scale to better compete with Ericsson’s (ERICb.ST) efficiency and technological dominance, and at the same time battle new low-cost Chinese rivals.

“Nokia and Alcatel-Lucent may want to consider a collaboration of sorts to gain scale against Ericsson and to fend off Huawei’s ascent with Western operators,” said Pablo Perez-Fernandez, analyst with MKM Partners.

“Huawei’s cost advantages and resulting competition may be the spark that ignites a marriage of convenience,” he said.

A deal would also make it easier for them to finance the heavy R&D spending required for the fight for dominance in next-generation wireless technology LTE. But few think it will happen.

“Both companies are coming from recent painful mergers, and this one would probably be even more complicated and painful,” said Bengt Nordstrom, the CEO of Northstream, a Swedish telecoms consultancy.

MERGER MALADIES

Alcatel-Lucent hasn’t turned a net profit since the 2006 merger of France’s Alcatel and Lucent of the U.S. left the firm with too many layers of management and overlapping staff.

Shareholders are still waiting for the 1.4 billion euros ($2 billion) in pretax annual synergies to materialize, while the company’s market capitalization has shriveled to about a fifth of its pre-merger levels.

Two very different cultures were embodied in double management -- a French chairman and American CEO, both finally replaced last year -- that for too long was mirrored throughout its lower echelons.

Nokia Siemens Networks, which was created in 2007 in a joint venture between the telecom networks operations of Nokia NOK1V.HE and Siemens (SIEGn.DE), has reported some operating profits and synergies of 2 billion euros.

But Nokia had to delay forming the joint venture for months due to bribery scandals at Siemens, and the firm is far from its 10 percent operating profit margin target.

This must be frustrating for Nokia managers, who might reconsider whether telecom equipment is part of its core operations, said several analysts.

The Nokia Siemens venture is a six-year deal lasting until 2013, and neither firm has commented on an exit strategy. Analysts say Siemens is not keen on continuing it because it has since left the telecom sector completely.

LOOKING FOR LTE

The reasons for merger remain compelling, however, as the market shrinks and as Huawei HWT.UL moves up the ranks.

Alcatel-Lucent and Nokia Siemens expect the market to shrink around 10 percent this year, and they have both been losing share of a smaller pie. Nokia Siemens’ market share in mobile gear slid from 26 percent a year ago to 20 percent in the second quarter, while Alcatel-Lucent slipped to 12 from 14, according to researcher Dell‘Oro.

Ericsson, steady at 32 percent, doubled its lead, but Huawei jumped to 17 percent from 10.

The smaller companies need to win LTE deals to prove they can survive. To date, Alcatel-Lucent has won just one major LTE contract with Verizon in the U.S., while Nokia Siemens has won a single deal with NTT DoCoMo in Japan.

Opportunity knocked when Canada’s Nortel collapsed into bankruptcy, putting its U.S. mobile assets on the block. Its CDMA and LTE assets would have boosted Nokia Siemens position in North America and helped it to win future LTE contracts.

The extra financial firepower of a bigger entity might have helped Nokia Siemens win the bid, but instead Ericsson showed its strength with a bid of $1.13 billion, nearly twice its rival’s initial bid.

Additional reporting by Jens Hack in Munich, editing by Will Waterman

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