Nordic telcos ponder Alcatel-Lucent merger

Nordic telecommunication giants Nokia and Ericsson will need to grow by acquisition to counter the long-term impact of a planned merger of Alcatel and Lucent on their business, analysts said on Monday.

Although neither is threatened in its core business by the link-up between the French and US heavyweights, Nokia will need to move to protect its networks business, and Ericsson its fixed-line activities.

Alcatel and Lucent announced at the weekend that they would merge to form a global giant worth about 33.0 billion dollars, the second-biggest telecom technology group in the world behind Cisco of the United States.

“Nokia Networks will be smaller than this new entity,” Nordea analyst Karri Rinta said. “They will have to at least acknowledge the fact that organic growth won’t be enough and that there is a need for acquisitions to strengthen product portfolio and market share.”

Several analysts said that, in the long term, an alliance or a merger with Germany’s Siemens would make eminent sense for Nokia, as this would take both companies’ combined networks market share to 25 percent against 15 for Nokia now.

Erkki Vesola, analyst at Mandatum, noted that Nokia’s leadership has an “almost cultural” aversion to large alliances.

But as Nokia faces losing its number two slot in mobile networks to the new Alcatel-Lucent entity, the Finnish giant may think again.

“The question (of merging or buying) is likely to be more and more presented to Nokia’s management,” Rinta said.

In addition, the new merger highlighted Nokia’s absence in broadband services which have become a profit lifeline for traditional telephone operators needing to capitalise on fixed-line networks.

“The convergence (of fixed and mobile services) is the potential saviour of historic operators and that’s where Nokia has a real problem,” said Francois Duhen at CIC Securities.

The Alcatel-Lucent alliance “marginalizes Nokia, which only does mobile”, he said.

Like Nokia, Ericsson need not fear for its core business following the Alcatel-Lucent merger as it is the world’s leader in mobile networks, including for the third generation, while the new group is strong in the North American CDMA standard and fixed lines.

But Ericsson’s vulnerable spot is the fixed-line business, where the new French-US entity will be strong, analysts said.

Following Ericsson’s link-up with Marconi, the share of fixed telephony in the Swedish company’s sales has grown to nine percent from three, reflecting its hope to find new growth in broadband services.

But now Ericsson needs to increase its fixed-line business even more to meet the new challenge, analysts cautioned.

“They could try to integrate small companies in the fixed lines business but not a big one because there is much work to do to integrate the new groups,” analyst Greg Johansson at the Redeye brokerage told AFP.

Analysts agreed that Alcatel and Lucent will have their hands full over the next year or so to make the merger work, giving their competitors ample time to think up a strategy of their own.

Ericsson was not expected to make any major acquisition decisions before the end of the year, and Nokia would not move until 2007, following the handover between chief executive Jorma Ollila and his successor Olli-Pekka Kallasvuo this summer.