Few big companies are as Frankenstein in M&A as Nokia. As early as 2006, Nokia and Siemens jointly announced the merger of the telecommunications equipment business of the two companies, and the two companies each invested 50% to establish Nokia Siemens Networks (with a total transaction value of up to 25 billion euros). Then, in July 2013, Nokia bought a 50 percent stake in Nokia Siemens Networks for 1.7 billion euros ($2.2 billion). Just a few months later, in September 2013, Nokia axed its sick phone division and sold it to Microsoft for $7.2 billion. Less than two and a half years later, in April 2015, the Finnish company bought Alcatel-Lucent for 15.6 billion euros ($16.7 billion), the result of the merger of Alcatel-Lucent in France and Lucent in the United States. The most recent deal was the $2.3 billion acquisition of Infinera, announced last week (June 27, 2024), the largest since that (the acquisition of Alcatel-Lucent).

- In June 2006, Nokia and Siemens announced the merger of their telecommunications equipment businesses

- In July 2013, Nokia announced the acquisition of a 50% stake in the joint venture held by Siemens for USD 2.2 billion

- In September 2013, Nokia announced the sale of its mobile phone division to Microsoft for $7.2 billion

- In April 2015, Nokia announced the $16.7 billion acquisition of Alcatel-Lucent

- In June 2024, Nokia announced the $2.3 billion acquisition of Infinera

The deal, which combines two major players in the optical networking equipment market, will leave potential customers with fewer options. Infinera, a California-based optical equipment specialist, generated $1.6 billion in sales last year, with the majority of its revenue, or about 60 percent, coming from North America. Nokia's optics division is part of its Network Infrastructure business group (Network Infrastructure Business Group, with sales of around €1.9 billion ($2 billion) in 2023, with the majority of its operations operating in other regions. Nokia insists that customer overlap is limited – presumably in the hope that any authorities concerned about the negative impact on competition will understand this.

But why, why now? Last year, interest in investment in network products by telcos appeared to be weak. Nokia's optical device sales fell 35% to 344 million euros ($368 million) in the most recent quarter, a decline the company attributed to an unfavorable comparison with the same quarter last year when demand was strong, when it rebounded after supply chain constraints in 2022. Infinera's first-quarter sales fell 22% to $307 million. CEO David Heard believes it has reached the "bottom of the demand cycle". Both OEMs are clearly expecting improvements in the future.

The boom in artificial intelligence

They may be right. While telcos are spending less and less on access networks, especially 5G, with the rise of artificial intelligence (AI), optical equipment is increasingly needed for the transmission highway to the data center. In addition to strengthening Nokia's optical position in North America, the acquisition of Infinera will also allow it to sign a wave of contracts with data centers and so-called "webscale" customers, i.e., investors in generative AI. Nokia notes that internet content providers currently account for 30% of Infinera's revenue.

Nokia CEO Pekka "AI is currently driving significant investment in data centers, and one of the main attractions of this acquisition is that it significantly strengthens our position in the data center market," Lundmark said on a conference call with reporters. "Of particular interest seems to be Infinera's expertise in intra-data center connectivity, i.e. connecting servers within a single facility. According to Lundmark, this "will be one of the fastest-growing segments of the overall technical communications market and one of Infinera's most significant strengths." ”

Scaling up is another important reason for Nokia's acquisition of Infinera, which helps Nokia speed up product development and increase pressure on competitors. Lundmark said that in a way, both companies are a bit too small in the market to invest enough money in R&D to compete with the two biggest companies in the market, Huawei and Ciena.

"This will provide us with the scale we need to invest enough in R&D to be able to fully match our key competitors," he added. ”。 Light Last year, Huawei and Ciena accounted for about 29 percent and 19 percent of the optical equipment market, respectively, while Nokia and Infineon accounted for 12 percent and 8 percent, respectively, according to research by Reading's sister company Omdia. (Dell'Oro analyst Jimmy.) Yu also said that based on his forecast for the optical transport market in 2023, he calculated that the merger of Nokia and Infinera would account for 20% of the optical transport market, becoming the second largest supplier. ）

Source: Nokia's official website

The combined company will have a strong development team responsible for the development of digital signal processors (DSPs), as well as expertise in silicon photonics and other key technologies in the field. Infinera's assets in high-speed and low-power optics are clearly suited to the needs of AI workloads, which is a clear attraction for Nokia.

Execution Risk

Still, there are risks. Nokia believes that by improving supply chain efficiency and optimizing the portfolio, the acquisition will generate about 200 million euros ($214 billion) of operating profit "synergies" (often a euphemism for cost cutting) by 2027. Raymond Simon, an analyst at James Leopold wasn't so sure. He said in a research note that the figure "seems too aggressive to us, as most investors are likely to expect a conservative preliminary estimate." ”

While Leopold downplayed what he called the prospect of "substantial sales synergies," he was also concerned about execution risk. "Vendors have different product architectures, and integration can be challenging," he said. "After going through the early acquisitions, Nokia should have been aware of these kinds of things. Its pre-2020 5G product problems were partly due to the previous management's complex task of integrating Alcatel-Lucent's mobile assets with Nokia's.

But Lundmark dismissed these objections. "The comments about the two different architectural approaches may have something to do with the fact that some applications are based on silicon photonics and some are based on indium phosphide, and we don't see them as mutually exclusive," he said. With this acquisition, we will have strong capabilities on both fronts, and we will have a strong DSP design team that will be able to lead us forward. ”

He expects the optical industry's shift to an open-architecture platform to help with consolidation, and said the €200 million synergy target is relatively conservative. "The total cost of sales of these two businesses is more than 2 billion euros ($2.1 billion) and total operating expenses are more than 1 billion euros ($1.1 billion)," he said. The total cost is more than 3 billion euros ($3.2 billion). In comparison, 200 million euros is not an exaggerated figure. ”

However, implementation will be crucial. Any difficulties could become opportunities for Nokia's main competitor in the West, Ciena. Ciena appeared to perform better than Nokia and Infinera in the first quarter, with overall sales down just 1.8% to around $1.04 billion. Infinera reported a net loss of $61 million, while Ciena made a profit of about $50 million. Just as Ericsson snatched mobile market share from Nokia after the Alcatel-Lucent acquisition, Ciena may be hoping to reap the benefits of Nokia's losses if the latest merger proves to be a distraction.

The deal valued Infinera at a 28 percent premium to its closing price on June 26, the same week Nokia sold its submarine network business to the French government for 350 million euros ($374 million). "In conjunction with the recently announced sale of Submarine Networks, we have now reshaped our Network Infrastructure business group to ensure it strengthens its technology leadership, enables growth and improves profitability," Lundmark said. ”

Nokia will pay at least 70% of the Infinera acquisition fee in cash, with the remainder in stock. As a result, it pledged to add to its previously announced share buyback program of 600 million euros ($642 million).

Omdia expects the optical networking market to grow at a CAGR of 5% between now and 2029. As a result, at a time when Nokia's large mobile business group, which accounted for 44% of total sales last year, is facing difficulties, a well-executed acquisition could lead to growth for Nokia. In the field of optics, Nokia may find some bright spots.