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What the Alcatel Lucent SA (ADR) Buyout Means for Nokia Corporation (ADR) Investors

By Tim Brugger - Sep 22, 2015 at 8:26AM

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The two networking giants are inching closer to becoming one, which could translate to a big win for investors.

Nokia (NOK -1.13%) created quite a buzz when CEO Rajeev Suri confirmed the rumors that had been swirling around for months that the once-king of mobile phones had decided to jump back into the fray. Unlike the days of yore, Suri doesn't plan on actually manufacturing the phones; he's in the process of seeking out partners to build the devices when Nokia's non-compete clause with Microsoft expires early next year.

Why Suri is interested in reentering the hypercompetitive smartphone market at all, particularly after ridding Nokia of its devices and services division, is a bit baffling, to say the least. But what makes the decision even more of a head-scratcher is that Nokia is making serious strides in what it does best: selling networking solutions.

Now it appears the $17 billion deal to acquire Alcatel Lucent (NYSE: ALU), a leading European networking solutions provider, could be finalized much sooner than the targeted mid-2016 closing initially announced. As with any acquisition, there are naysayers, but for investors, Nokia bringing Alcatel Lucent into the fold is where the real opportunity lies.

A solid foundation
One look at Nokia's second quarter financial results makes it clear it's a networking provider, plain and simple. Of Nokia's $3.62 billion in revenue during the second quarter, 85% came from its networking unit. The HERE maps and technologies divisions were a distant second and third, respectively. And the disparity between Nokia's unit revenue will widen soon, given its decision to sell its mapping unit to a group of German auto manufacturers for a cool $2.8 billion.

Better still, thanks in large part to improving margins, Nokia's 6% jump in networking sales last quarter resulted in an 11% increase in operating profit, much of which made it to the bottom line. Earnings popped 50% for the quarter compared to last year, to $0.10 per share. Interestingly, the Asia-Pacific and Europe markets were handily Nokia's best-performing regions, each about double sales in its North America region.

The relative weakness of Nokia's North American network sales results will get a significant boost when the Alcatel Lucent deals closes, if history is any indication. Nearly half of its $3.9 billion in revenue last quarter were generated in North America, with Europe, Asia-Pacific, and the rest of the world bringing up the rear. In addition to the obvious synergies -- products, services and presumed efficiencies -- a combined Nokia and Alcatel Lucent will instantly enhance geographic revenue diversification.

Closing in
Thanks to a quicker-than-expected regulatory approval process, the scuttlebutt from both Nokia and Alcatel Lucent execs is the aforementioned mid-2016 closing is likely to occur long before initially expected. One of the last major hurdles to overcome was getting rubber-stamped by the Committee on Foreign Investment in the United States (CFIUS). The European Union and U.S. Department of Justice have already given their seals of approval.

As of a few days ago, Nokia announced that the CFIUS has cleared the Alcatel Lucent acquisition to move forward. Now all that remains is for Nokia shareholders to OK the deal and getting the last few remaining regulatory bodies involved to conclude their reviews. No word on just how quickly the acquisition is now expected to finalize, but it's likely to happen sooner rather than later, which should be music to Nokia investors' ears.

As for the technologies unit -- the team ultimately responsible for Suri's smartphone push -- Nokia should stick to niche markets like its new high-end virtual reality camera Ozo and raking in patent-related revenue. If Nokia is set on devices and assorted mobile goodies, let its recently released N1 Android tablet or smartphone app Z Launcher foot the bill. Because with the Alcatel Lucent deal imminent, Nokia's future success, or lack thereof, is most dependent on its networking sales -- period.

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