Usually when companies merge, investors can expect a premium for their shares if they own part of the company being acquired. However, this may not be the case for the Alcatel-Lucent S.A. (NYSE: ALU) and Nokia Corp. (NYSE: NOK) merger. The gains from a news leak are being given back, and it feels like a very low premium, considering how much pain Alcatel-Lucent shareholders have been forced to endure.
Reports that these two companies are in advanced merger discussions had both companies reacting to the news on Tuesday, but the confirmation of the news is simply underwhelming. While the deal might be better for Alcatel-Lucent than Nokia, at least on the surface, 24/7 Wall St. could not help but wonder what a combined Nokia/Alcatel-Lucent might really look like in the future.
The formal merger terms are 0.55 of a new Nokia share for each Alcatel-Lucent share. The all-share transaction values Alcatel-Lucent at €15.6 billion on a fully diluted basis. This was said to be a fully diluted premium of 34% and a premium to shareholders of 28% on the unaffected weighted average share price of Alcatel-Lucent for the previous three months. This is also based on Nokia’s unaffected closing share price of €7.77 on April 13, 2015. The premium sounds good if you just read the story, but if you have followed this story for the past decade or so it lacks enthusiasm.
To begin with, what might get sold off or what might be enhanced? Then there are regulatory and shareholder issues. There is also the integration issue of foreign companies with employees who might not always be on the same side or who might not integrate well. Lastly, what other deals could get triggered, or what other companies might be up for consideration?
There could be regulatory hurdles in at least some of the jurisdictions. French regulators have reportedly said they would welcome a deal like this, but there are many jurisdictions where both companies operate independently. There are also likely to be some customer overlaps, some of which might not be a “1 + 1 = 2” scenario in every instance. Again, the reaction to the deal looks like it would be more beneficial to Alcatel-Lucent than to Nokia. Still, one never knows until terms of a deal are announced.
Nokia now offers network infrastructure products and services around the globe. Its four segments are Mobile Broadband (mobile voice and data), Global Services (network implementation and network modernization, hardware and software maintenance, etc.), HERE (mapping, location intelligence, location-based services, and local commerce) and Technologies. Its large mobile operator clients include Bharti Airtel, China Mobile, Deutsche Telekom, NTT DoCoMo, Softbank, Sprint, Telefónica, Verizon and Vodafone. Word has been out for a while that Nokia may sell its mapping unit — which would ultimately help Nokia pay for Alcatel-Lucent.
Nokia is the darling of Finland. Its long slow decline ultimately led to the sale of its handset unit to Microsoft. Now many investors have a hard time really knowing what they are investing in. Nokia American depositary shares (ADSs) were down 4% at $7.96 at the close of trading in New York. Trading volume of 77 million ADSs was about four times normal on the day. Its market cap is listed as roughly $29 billion on Yahoo! Finance. What may matter the most here is that Nokia’s balance sheet.
As far as Alcatel-Lucent, the French tech and advanced communications outfit has been involved in a turnaround and its shift plan for what feels like an endless number of years now. It is involved in networking, ultra-broadband access and cloud technology for the ultra-connected world. Its customers are made up of telecom and cable operators, defense forces and governments, and large enterprises in industry and infrastructure. The company recently passed a 300 million DSL port mark as well.
Looking at the chart for Alcatel-Lucent chart, this company has struggled since it fell off a cliff in 2007 — and it was even worse of a drop in the prior years. Shareholders have really had nowhere to go since that time. The premium being offered for this merger is so small that it makes 24/7 Wall St. question if investors might have to hold out for another 10 years just to get a decent price.
Nokia peaked in late 2007 near the $40 price level, and since that time it has fallen equally far off a cliff to the current price level. Looking back as far as 2011, the price level has not made any real significant change. It is not unfair to say that Nokia has been stuck in the mud.
American depository shares (ADSs) of Alcatel-Lucent closed Tuesday up 13.3%, at $4.93 in a 52-week trading range of $2.28 to $4.96. In premarket trading Wednesday, the ADSs gave it all back and then some, down 15% at $4.18. The ADSs have a consensus analyst price target of $4.19.
Nokia ADSs closed Tuesday down 4.1% at $7.96. In the premarket trading Wednesday, ADSs made a slight recovery, up 1% at $8.04. The ADSs have a consensus analyst price target of $9.39 and a 52-week trading range of $7.00 to $8.73.
Does this sound like a great deal for Alcatel-Lucent shareholders?