What’s In an Alcatel Deal for Nokia Stock?

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After years of speculation that it might happen, Nokia Corporation (ADR) (NYSE:NOK) and Alcatel Lucent SA (ADR) (NYSE:ALU) have finally announced that they’re speaking with one another regarding a possible deal that would result in Nokia acquiring Alcatel.

What's In an Alcatel Deal for Owners of Nokia Stock?Owners of ALU stock were elated about the possibility the struggling company finally had a chance to make some sort of forward progress, sending ALU higher nearly 14% since the news began to circulate.

Owners of Nokia stock, conversely, aren’t as thrilled. They sent Nokia shares 5% lower on the news, concerned the company was looking to acquire a competitor that would be more of a headache than an asset.

Regardless — and barring any unlikely action from a French Economy Ministry that has expressed concern about potential job losses — the deal between Nokia and Alcatel is likely to materialize. And, though the initial feelings appear to be mixed, this union really is a win-win scenario for current owners of Alcatel Lucent and Nokia stock.

The Upside for Nokia Stock

If Nokia wants to buy Alcatel Lucent, it’s going to need to come up with about $13 billion to do so. That, however, wouldn’t be a problem. It’s got $7.9 billion in cash and short-term investments at this time, and could easily liquidate its HERE mapping service for roughly $2 billion.

Throw in the fact that despite habitual losses Alcatel still has $5.5 billion cash on the books that could partially fund its own acquisition, money is the least of the potential impasses.

Affordability isn’t the reason current owners Nokia stock may want to support the union, however.

Not that it ever had a dominating presence in the United States, but ever since the sale of its mobile phone division to Microsoft Corporation (NASDAQ:MSFT) last year, the remaining networking infrastructure business has struggled to further penetrate the U.S. market.

Keeping that effort at bay is none other than Alcatel Lucent, which maintained strong business relationships with AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). Teaming up with Alcatel would give Nokia a better foothold in a tough but lucrative market.

That being said, it should be made clear that neither company has offered any real details about the proposed union; the media and investors have connected the dots. It’s still possible the discussion is solely focusing on Nokia acquiring the wireless division Alcatel Lucent.

Such a deal seems less likely than an outright buyout, at first, considering Nokia effectively threw in the towel on its handset business by handing the keys over to Microsoft after the Apple Inc. (NASDAQ:AAPL) iPhone and Android-powered smartphones Samsung Electronics LTD (OTCMKTS:SSNLF) left Nokia well behind in the U.S. smartphone race.

But, that’s an American point of view. While Nokia is unlikely to displace Apple and Samsung in the United States, it may well have a shot at taking on smartphone makers Ericsson and Huawei in other key markets.

It’s not just Nokia stock holders that have something to look forward to in whatever partnership may materialize between Alcatel and Nokia, though.

Like it or not, Alcatel Lucent has been consistently losing money since 2012. Though analysts foresee a swing back to profitability for ALU beginning this year, it’s difficult to trust the optimistic outlooks when the company has been hot and cold on the earnings-surprises front in the recent past — especially if Alcatel loses the ground that it’s largely expected to cede this year in the wireless market.

With Nokia helping out, the burden is at least partially eased.

Bottom Line for Nokia Stock

Giving full credit where it’s due, Berenberg analysts Jean Beaubois and Adnaan Ahmed may have summed up the urgency of an acquisition of Alcatel and Nokia best:

“Why now? It has to happen now as 1) Alcatel CEO is fully aware that next year its wireless business might go back in the red as its two largest markets; China and the U.S. will go backward 2) both companies will start to work on their 5G platforms soon and they don’t want to end up having to support both and reduce the potential cost synergies 3) 5G is much more wireless-wireline integrated and thus Nokia needs Alcatel’s IP Tech to offer a better integrated solution.”

In other words, when you’ve got the smaller army, the enemy of your enemy is your friend … especially if you’re fighting a losing battle.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/whats-in-an-alcatel-deal-for-owners-of-nokia-stock/.

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