Nokia (NOK) is expected to complete its all-stock acquisition of Alcatel-Lucent (ALU) early next year, a merger that is going ahead of schedule, according to Nokia’s CEO Rajeev Suri.
While ALU stock still trades about 30% below its implied purchase price, Nokia, too, presents great long-term investment value following the merger.
The bottom line is that Nokia can achieve synergies and market opportunities with Alcatel-Lucent that it can not possibly achieve alone. NOK expects to achieve cost savings of nearly $1 billion annually by 2019, which will mean much higher margins for the combined company.
The reason is because Alcatel-Lucent and Nokia are both telecom-equipment vendors, targeting many of the same ustomers. Nokia will be able to consolidate operations while streamlining its marketing approach and likely lowering its headcount as a combined entity.
With that said, this merger is sure to bring about significant growth opportunities as well. While the two companies are similar, they are also very different, and that is important to understand in regards to how this combined company will grow.
Similar, but Very Different
Alcatel-Lucent and Nokia both sell equipment to telecom companies, both have a global reach and both are enormous companies with around $30 billion in combined revenue. Because of their differences and cross-selling opportunities, however, that $30 billion number will rise. This, combined with the margin improvement from cost-cutting, is why investors should own Nokia long-term.
NOK is a builder of networks, like base stations and towers for the construction of 2G, 3G and 4G networks, as well as WiFi solutions. Meanwhile, Alcatel-Lucent’s technology and products make networks better, like its IP routing, switching and optical equipment. Combined, this creates an all-around well-diversified business that can compete with juggernauts like Cisco (CSCO) and Ericsson (ERIC).
How the Company Grows
While both Alcatel-Lucent and Nokia are global companies, each thrives in different areas of the world. NOK is a dominant vendor in India, having 34 total contract wins in India last year. Alcatel-Lucent’s presence is not nearly as strong in India, but with IP traffic expected to grow at a compound annualized rate of 33% from 2014 to 2019, Alcatel-Lucent will now have a great opportunity to capitalize with its IP-routing and IP-switching businesses.
Likewise, Nokia will have new opportunities to grow its Chinese business, a region where Alcatel-Lucent thrives. This seems to be a top priority for Nokia. Alcatel-Lucent’s joint venture with China Huaxin created $5 billion in revenue last year in China, far better than the $1.5 billion that Nokia created in China. Ahead of the merger, Nokia has already solidified its partnership with China Huaxin to add network construction to the mix, thereby giving Nokia the opportunity to grow its core business larger in China.
Furthermore, ALU’s 7950 XRS routing products are top of the line, gaining a market-best 34 contract wins last year including deals to use the routers in China Mobile, China Unicom and China Telecom’s 4G mobile networks.
Not only does this give Nokia a backstage pass to these three massive carriers, but Nokia can now sell the best routing product line in the world (the 7950 XRS) to its customers. In the past, Nokia would have to sell Juniper’s routing products to its customers in need of such services, but by acquiring Alcatel-Lucent, NOK gets a major upgrade in this arena, while also getting to collect the revenue and profits itself.
The Best Investment in This Merger
Once Nokia and Alcatel-Lucent are merged, the combined company will have partnerships with all four U.S. nationwide wireless-service providers, offer just about every wireless network construction product and service available today and will gain the aforementioned new synergies and market opportunities.
In essence, these are enormous companies with a wide range of growth and cost-cutting opportunities. This makes the reasons for buying NOK stock at just 14 times earnings very obvious. However, it wouldn’t be a bad idea to grab some ALU shares too.
Yes, Alcatel-Lucent’s buyout price is determined by Nokia stock price, but at Nokia’s current price, there’s still upside of more than 30% in ALU. Seeing as how those ALU shares will eventually become Nokia stock, it would seem there is great value in owning both stocks ahead of the merger.
Not only would investors own an undervalued Nokia stock, but also capitalize on the near-term upside of ALU, and then after the merger those ALU shares would become the new Nokia stock.
Regardless of how it’s played, this is one combined entity that long-term investors should want to own.
As of this writing, Brian Nichols was long shares of ALU and NOK.
