Sunday 25 February 2018

Beleaguered Nokia looks for renaissance with its €16bn takeover of France's Alcatel

Nokia smatphones
Nokia smatphones

Is Nokia about to rise again? The Finnish firm, once the world's top phone maker, was down and out after succumbing to Microsoft. But now it has announced that it is to buy Alcatel-Lucent in an all-share deal that values its smaller French rival at €15.6bn, building up its telecom equipment business to compete with market leader Ericsson.

Nokia's takeover of Alcatel-Lucent will redefine a telecom equipment sector suffering weak growth prospects and pressure from low-cost Chinese players such as Huawei and ZTE.

The combined company will have about 114,000 employees and combined sales of around €26bn. In mobile equipment it will rank a strong second, with global market share of 35pc, behind Sweden's Ericsson with 40pc and ahead of Huawei's 20pc, according to Bernstein Research.

In merging together, the two companies are betting they can also get an edge connecting millions of intelligent machines that haven't been invented yet.

The advent of mobile technology to power high-speed connections for everything from driverless cars to robotic surgeons was a key driver in the merger discussions, according to people familiar with the transaction. The companies are eager to build scale in research and development before the rollout of such fifth-generation systems, so they can avoid losing out to Asian rivals such as China's Huawei.

Installing the systems will require an extensive transformation of wireless infrastructure to allow speeds about 100 times faster than the best currently available technology, at a potential cost of trillions of euros. The GSM Association, which represents mobile carriers, estimates they'll spend €1.5 trillion on networks between 2014 and 2020, mostly on the current fourth-generation standard.

A 5G rollout won't be cheap either. "Alcatel doesn't have the means to develop a competitive 5G solution," on its own, said Alexander Peterc, an analyst at Exane BNP Paribas. While Nokia could do so, "if you can leverage your 5G across a worldwide footprint, including North America, you're going to be a lot more profitable," he said.

Huawei and Samsung are doing their best to get a head start on their European competitors. The Chinese company is working with Russia's OAO MegaFon to have a 5G network in place in time for the football World Cup in 2018. Samsung has made a similar pledge for the 2018 Winter Olympics. In Europe, Ericsson is also hard at work on 5G, recently announcing a plan to study autonomous buses.

"The risk we all faced collectively is that only Chinese players drive 5G technology forward, because European players aren't solid enough," French Economy Minister Emmanuel Macron told reporters in Paris on Tuesday.

In addition to its speeds, 5G technology promises to transmit new kinds of information over mobile networks.

Delays of less than a millisecond could allow driverless cars to respond to real-time traffic data; connections could be made responsive enough to transmit human touch across networks to power sophisticated robotics. More prosaically, homes will be stuffed with connected refrigerators and thermostats, and factories with smarter equipment.

All those new applications will mean many more network-connected devices than exist currently. Cisco Systems estimates that by the time 5G is deployed there will be 50bn devices connected to the internet. To handle all those demands, networks will need more antennas to carry mobile signals and companies will have to build more advanced technology across their infrastructure.

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