Markets
TTM

Good Deal But Bad Idea: Nokia Corporation Buys Alcatel-Lucent SA

ALU Free Cash Flow (TTM) Chart
ALU Free Cash Flow (TTM) Chart

ALU Free Cash Flow (TTM) data by YCharts

Total revenues have fallen 30% over the last seven years. Meanwhile, Alcatel-Lucent's arch rivals Juniper Networks and Ciena showed no signs of slow sales at all:

ALU Revenue (TTM) data by YCharts

So Nokia is buying a laggard, not a leader, in the telecom networking hardware space. At the same time, the Finns tether themselves to one specific hardware provider, limiting its ability to shop around for the best deals on the best solutions from all players in the market.

And for this, Nokia shareholders will endure massive dilution of their existing positions. I don't think that's a great idea.

If anything, this agreement looks like a positive event for LM Ericsson as well as other network installation and maintenance specialists. A major competitor just hamstrung its choices for hardware installations, and the whole affair smells like desperation and stale Koskenkorva.

Nokia CEO Rajeev Suri says that this is "the right deal, with the right logic, at the right time." In his view, the merger is all about innovation and economies of scale. Alcatel-Lucent CEO Michel Combes can only nod in agreement.

From where I sit, Nokia is risking billions of dollars in shareholder value (but not in cash -- smart choice!) to build a fully integrated network infrastructure provider. With hardware, installation services, and network management operations all under a single roof, Nokia does become a unique player in this market.

But it's a risky bet. If I were a Nokia shareholder, I would much rather have seen the company doubling down on what it does best and continue to shop around for the best deals and solutions in hardware. The one-stop shopping model doesn't automatically make sense in every sector.

Nokia might get lucky and become a top-to-bottom power player just as the Internet of Things starts requiring serious wireless network upgrades. By the same token, Nokia could also completely miss the boat on the IoT revolution and the upcoming 5G network rollouts.

There are no guarantees but tons of risk. Feel free to place your bets. Me, I'll be watching Nokia's big hardware play from the sidelines.

This $19 trillion industry could destroy the Internet

One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism... The Economist is calling it "transformative"... But you'll probably just call it "how I made my millions." Don't be too late to the party -- click here for one stock to own when the Web goes dark.

The article Good Deal But Bad Idea: Nokia Corporation Buys Alcatel-Lucent SA originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days .We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

TTM ERIC NOK CIEN

Other Topics

Stocks

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More