Microsoft (NASDAQ: MSFT ) acquires Nokia's (NYSE: NOK ) handset business and now Nokia is reportedly interested in purchasing Alcatel-Lucent's (NYSE: ALU ) wireless division. Assuming all deals materialize, each company will have a completely new look. But is that look good for shareholders?
Ready to spend Microsoft's money
After Microsoft's surprising acquisition of Nokia's handset business, Nokia's revenue was essentially cut in half to $20 billion over the last 12 months. As a result, Nokia has gone from being an unprofitable technology laggard to a cash-rich telecom network and solutions company.
Now, Nokia is considering an acquisition of Alcatel's wireless division . For Alcatel, wireless is the company's largest segment, creating $1.3 billion of the company's near $4.7 billion last quarter . While LTE has remained strong, weakness from 2G/3G has led to consistent fundamental declines in wireless.
Over the last year, Alcatel has spent hundreds of millions on developing LTE to meet consumer demand. Moreover, large sums of cash has also been spent on its new lightRadio, which improves network capacity up to 70% by utilizing the most efficient service (whether it be Wi-Fi or cellular access ).
LightRadio is able to deliver this increased performance due to deploying a higher ratio of macro cells in place of small cells. Alcatel is able to secure this technology due to their massive IP portfolio of more than 30,000 patents.
As part of the Microsoft-Nokia deal, Nokia lost an undisclosed percentage of its patents, which is likely hefty due to the $7.3 billion that Microsoft paid to acquire Nokia's handset segment and IP. In the case of Alcatel, the company has thoroughly developed its wireless division throughout the globe, and also has the IP that Nokia likely craves.
The fact of the matter is that Nokia is now a telecom equipment company, and with nearly $20 billion in cash (following the Microsoft deal), Nokia has money to spend. With that said, Alcatel's LTE growth, ecosystem, patents, and lightRadio all hold significant value to a cash rich equipment company such as Nokia. And with half of Nokia's business gone, the company must make moves to support its now $25 billion valuation, and to maintain shareholder value.
Creating a new look
To me, this deal would make sense. It is a business valued at $2 billion , and it would allow Nokia to strengthen its wireless ecosystem and it would give Alcatel much needed cash. Moreover, Alcatel would be able to focus on emerging segments.
During Alcatel's last quarter, its IP routing segment grew 21% year-over-year. This particular segment aids in data solutions, and is also integrated with the company's optical division. The optical division saw a 7% decline last quarter, but its book orders grew 40% (suggesting future growth).
Much like Alcatel's wireless division, optical has suffered due to a natural transition between new and old products. However, many believe that optical combined with IP routing is the future for Alcatel, which contributed $1.3 billion during the company's last quarter.
Does it benefit shareholders?
With all things considered, Alcatel investors are hoping this deal materializes, which is evident by Alcatel's near 6% jump on Wednesday. It is well known that Alcatel is going through a restructuring, but has also been hesitant to sell assets to strengthen its financial position.
At 0.41 times sales, Alcatel still lags the valuation of others in the telecom equipment space. Cisco and Juniper trade at 2.66 and 2.29 times sales respectively. Therefore, Alcatel could afford to sell its Wireless division and still add value to shareholders, so long as margins and growth improve.
In the case of Nokia, it is now trading at 1.25 times revised sales, which is still fairly cheap, but Nokia needs to secure its future as a telecom equipment company with a big acquisition. With that said, both companies look better than Nokia's handset acquirer Microsoft, who reportedly needs sales of Windows smartphones to double in order to breakeven .
With a market cap of $270 billion and about $70 billion in cash, Microsoft's not going broke if its acquisition of Nokia's handset business fails. In fact, the acquisition makes Microsoft more diversified, now having a large hardware segment to compliment its impressive software. With that said, smartphones can be lucrative, and are growing rapid throughout the globe, but hopefully Microsoft is smart enough not to place all its eggs in this one hardware basket. Investors must remember, BlackBerry was once a $100 billion company, and we all know how their story ends, trying to compete with superior brands.
One might conclude that the rotation of capital between Microsoft, Nokia, and possibly Alcatel-Lucent is very simple: Microsoft buys Nokia's junk; Nokia buys Alcatel's junk; and Alcatel benefits the most while Nokia maintains much of its large cash position. In many ways, it's a win-win scenario for all parties involved, as each company gains something needed, while taking an overhang from another company.
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