The merger that nearly wasn’t – how the Nokia and Alcatel Lucent deal was done

Alcatel Lucent and Nokia never discussed a full merger until the 11th hour, focussing instead on carving out Alu's wireless division. And who were Company A and Company B?

Documents filed by Alcatel Lucent this week show how a full merger of the companies was never the long term plan, and confirm that the company and Nokia were investigating the sale of just Alu’s wireless business right up until the last moments of their discussions.

Alcatel Lucent and Nokia held their first discussions about a possible strategic alliance or merger in the early summer of  2013, yet it was not until January 2015 that the Finnish company first proposed a full combination. The intention to merge was made public in April. The chain of events shows quite how much work the companies still had to do to understand how to effect a full merger when they held their joint press conference on April 15, 2015.

At that press conference both CEOs made a great play of the benefits of having increased scale and scope and the breadth of the full portfolio of both companies. You would never have guessed that the full merger had in fact been in play for fewer than three of the 24 months of discussions. Alcatel Lucent CEO Michel Combes was even moved to state, “The movement we are triggering means some actors will have to ask themselves a few questions, focus on widening their portfolio [of] operations.” He meant Ericsson, and his words were this week proved prophetic.

Tracking the deal

To understand how the deal unfolded, and how the companies fell upon an outcome they now present as optimal, start back in early 2013. Alcatel Lucent was entering a plan to revitalise its business and achieve a refocussing of its strategy – called the Shift Plan – but the board also felt it should be looking for other strategic options. Accordingly, it decided to talk to a few key players to see who might be interested in some sort of strategic alliance.  The first talks with Nokia began in May/June 2013. The French vendor kept its options open, also contacting two other companies – known in the document as Company A and Company B.

Nor was a full acquisition by NSN (as Nokia Networks was then known) the first option – instead both NSN and Alu seemed to be far keener on a sale of the wireless business to NSN in return for Alu gaining a stake in the enlarged NSN. The company also seriously considered an approach from “Company B” to buy outright large parts of the business.

Talks with all three continued sporadically and by May 2014 three options involving external parties were on the table:
1. sell the wireless business to Nokia,
2. a JV with company A,
3. a combination with Company B.

A fourth option – splitting off the wireless business as a separate entity – was also still live.

The idea of hiving off the wireless business to NSN was discussed in a “substantive” way by Timo Ihamuotila (NSN) and Jean Raby (Alu) in July 2014. The two did not, apparently, discuss a full combination of the two companies.

(In fact, Alcatel Lucent talked at this stage to “several other parties” about a potential strategic transaction, although these talks appear to have gone nowhere substantive.)

By the end of July the previous three options remained open. However, in August, Company B again proposed to buy Alcatel Lucent outright, excluding the wireless business, pension liabilities and Alcatel Lucent Submarine Networks. Alcatel Lucent was keener on a full combination – and said so. Some limited due diligence was carried out at this stage, including into Alcatel Lucent Shanghai Bell. (Was Company B a Chinese company?)

Meanwhile, discussions with Nokia – proposing just the sale of the wireless business – continued in earnest, with several calls and a presentation in New York by Alu’s wireless business to Nokia and its financial advisors. But there were sticking points around the scope of non-compete agreements in overlapping areas, and around a potential strategic agreement in IP routing.

It was Nokia or nothing – and the deal was still for the wireless business only.

However, Nokia remained interested in the wireless business, and Rajiv Suri called again in late September to propose taking it off Alcatel Lucent’s hands for EUR600 million. Alu said this was not enough. Nokia upped its offer to EUR1.1 billion. Shortly after that it made another, written offer, of EUR1.15 billion plus EUR250 million cash, post-closing.

So, by October here’s the situation for Alcatel Lucent’s board. Sell the wireless business to Nokia, or combine with Company B. That changed by December, with Company B now out of the running as discussions stalled. It was Nokia or nothing – and the deal was still for the wireless business only.

Why not buy the whole thing?

However, although discussions continued right through January, with a long exchange of conditions and the building of a potential terms sheet, on January 26 Nokia moved things on a stage further by offering, for the first time, to consider an outright acquisition of all of Alcatel Lucent.

The parties then kicked this around, in parallel with the sale of just the wireless business. CEOs Suri and Combes met in London in February 2015, and talked about both options. Yet it was becoming clearer through February that it was just going to be too difficult to carve out Alu’s wireless business – with “significant obstacles to execution” remaining. Alcatel Lucent customers were also giving it grief over the disruption the wireless sale could bring.

The full merger was now the only game in town. And the more the companies looked at it the more it made sense. They felt that the market preference was moving towards large vendors with scale and scope, especially when it came to 5G.

It was now March 2015 – approaching two years since the companies first talked – and the discussions on the terms of the deal begin. A first proposed exchange ratio of 0.538 Nokia share for each Alcatel Lucent share was bumped up to 0.55. Alcatel Lucent’s board had a think about it, and approved the exchange ratio on 29 March.

By early April, there was a draft MoU for the full acquisition. Then on April 13 the first press reports of an offer by Nokia to buy Alcatel Lucent’s wireless business appeared.  That story was nearly right, and required a response. Accordingly, the next day the companies put out a statement confirming that, in fact, they were in the advanced stages of a full combination of the companies. The day after that they published their MoU on that full combination and held that press conference.

The rest is (recent) history.