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Ericsson, Juniper are next as Nokia wakes up industry: Real M&A

Wednesday, April 15, 2015 - 07:29

[NEW YORK] Deal watchers should turn their attention to the communications-equipment industry because Nokia Oyj is about to set off a whole new round of mergers.

The Finnish company confirmed Tuesday that it's in talks to buy France's Alcatel-Lucent. Not only would the purchase give Nokia the lead in selling wireless equipment to customers such as AT&T and Verizon Communications, it would also help Nokia expand into wireline assets such as routers.

The deal - which would top US$13 billion - could herald a new era in the industry in which competitors such as Sweden's Ericsson and Juniper Networks will need to broaden their swath of products via acquisitions so that they can provide all of the equipment that telecommunications companies need. It would mark a switch in an industry that's been dormant on the deal front in recent years.

"We're entering a period in the industry where a lot of deals could happen," Mike Genovese, an analyst at MKM Partners in Stamford, Connecticut, said in a phone interview. "Nokia and Alcatel getting together will put pressure on Ericsson to get into wireline and optical, too. It tends to be a copycat industry."

Mr Genovese identified some potential buyers and targets. Juniper, with a market value of US$9.7 billion, could be either. Ericsson, which will lose its lead in wireless equipment to a combined Nokia and Alcatel-Lucent, could respond by buying Juniper to add IP routers. Or Ericsson could opt for Ciena, the US$2.3 billion maker of optical-transport systems with which it already has a partnership. Infinera, another optical-equipment maker valued at US$2.65 billion, could draw the interest of Cisco Systems or Juniper, he said.

Carriers such as AT&T and Verizon tend to stagger their capital expenditures on wireless and wireline networks, devoting six months to one before turning to the other.

"It's lumpy," Mr Genovese said. "If you're only on the wireless side or the wireline side, your business goes away for two quarters. So it makes sense to be end-to-end to be able to offset that and address the entire capex budget of the carriers." Representatives for Ericsson, Cisco and Infinera declined to comment. Representatives for Juniper and Ciena didn't immediately respond to phone calls or e-mails seeking comment.

Shares of Ericsson were unchanged on Tuesday at 114.30 kronor in Stockholm. Juniper surged 1.5 per cent to US$23.95 at 1:06 pm in New York, while Ciena jumped 7.7 per cent and Infinera climbed 3.1 per cent.

A takeover of Juniper, Ciena or Infinera would give Ericsson a chance to sell more products to some of its current customers, such as AT&T, Verizon, Deutsche Telekom AG, Vodafone Group Plc and Orange SA, according to supply-chain data compiled by Bloomberg.

All-cash deals for Juniper or Ciena at a hypothetical 30 per cent takeover premium would immediately boost Ericsson's earnings, data compiled by Bloomberg show. Infinera may slightly dilute earnings this year and next. That's before accounting for any overlapping costs that Ericsson could cut. The company had about 75 billion kronor (US$8.6 billion) in cash and cash equivalents as of December, the data show.

BLOOMBERG