Finding consensus among investors, industry analysts, and credit reporting agencies is rarely straightforward for any company. The often wildly different opinions really hit a high note when an acquisition is on the table -- particularly, a major transaction like the proposed $16.6 billion acquisition of Alcatel-Lucent (UNKNOWN:ALU.DL) by rival networking equipment provider Nokia(NYSE:NOK).
On the face of it, there is a lot to like about Nokia becoming the largest mobile network equipment manufacturer in the world. Add what is expected to be significant cost savings to what would immediately become a mobile industry behemoth, and it is no wonder leading credit rating agencies like Standard & Poor's are bullish on the deal. But not everyone is on the same page.
Here is the deal
After weeks of speculation, Nokia announced its plans to acquire all of the outstanding shares of its France-based rival for the equivalent of .55 shares of Nokia stock. Assuming the deal passes all the requisite regulatory and shareholder hurdles, Nokia expects the deal to close in the first half of 2016.
To be sure, Nokia is taking on a significant challenge integrating Alcatel Lucent operations into its existing hierarchy. According to Nokia, the combined companies would boast over 40,000 research and development employees alone. The deal would also be the biggest ever in Finland.
In our humble opinion
The same day Nokia announced its acquisition, a managing director at Moody's issued a statement bemoaning the move. According to the credit rating agency, the problems are primarily two-fold. First, Alcatel Lucent has performed poorly since merging with Lucent nine years ago, leaving much to be desired. What makes Nokia think that it will do better integrating the companies? Second, Moody's is not confident that Nokia will be able to successfully assimilate Alcatel Lucent personnel and properties. These are legitimate concerns, in-line with Moody's current Ba2 rating for Nokia, which is two steps below investment grade status.
Fast forward two days to April 17th, and S&P issued a statement upgrading Nokia from BB to BB+ based on "resilient prospects for 2015." Likewise, while the Alcatel Lucent deal was initially seen in a favorable light by analysts, several have since lowered their outlook for Nokia due, in large part, to similar concerns shared with Moody's.
Where do we go from here?
When Nokia officially divested itself of its long-time, money-losing smartphone manufacturing unit about this time last year, executives made it clear one of the primary reasons was to focus on its more profitable units: namely, its networks division. Last quarter is an ideal example of just how reliant Nokia is on its networking solutions.
Of its $4.1 billion in revenue in fourth quarter 2014, over 88% came from network sales. Its HERE maps unit and technologies businesses (home to the highly profitable Nokia patent portfolio) made up the balance. In fact, on the same day Nokia announced the deal, management confirmed it had "initiated a review of strategic options" of its HERE maps division. As was the case with its phone business, Nokia drew a line in the mobile networking sand, and so far, it is working.
Networking sales jumped 8% year-over-year during the fourth quarter, and margins in the division expanded to 14% from 11.2%. Mobile broadband sales really took off, increasing 13% year-over-year, which dovetails nicely with offerings from Alcatel Lucent.
With so much conflicting information, what is an investor to do? There will be challenges ahead, as Nokia naysayers have pointed out. However, Alcatel Lucent is perfectly aligned with Nokia's long-term networking plans. Shareholders are seeing results, and there is no reason to believe it will not continue doing so. For long-term investors willing and able to assume a bit of risk, the "new" Nokia is worth considering for the more aggressive piece of your portfolio.