Nokia's Comeback Saga
With the reports that Nokia is close to acquiring French-U.S. Alcatel-Lucent, Chief Executive Officer Rajeev Suri looks set to crown his efforts to revive a business that suffered one of this century's biggest corporate implosions. That would be good, too, for Finland, whose dependence on a single company's fortunes is rare among developed economies.
In recent years, as the telecommunications company went, so went Finland's economy. It was a frightening downward journey:
For most of this time, Nokia was being killed by its first non-Finnish CEO, Canadian-born Stephen Elop. He turned the company from the global leader in mobile handsets, into a niche player that sold smartphones with a clunky operating system (developed by Microsoft, Elop's former employer) and unnecessarily high-resolution cameras. This experiment ended with the sale of Nokia's handset business to Microsoft last year, turning the U.S. software giant into the world's third-biggest seller of mobile phones.
Finland was, as a result, orphaned. The country was deprived of its national champion just as its other export mainstay, the pulp and paper industry, was in mortal pain from the shrinking of the global print media. Known as one of the world's most high-tech economies in the early 2000s, Finland was suddenly suffering from technological deprivation.
It was up to another foreigner, India-born Suri, to salvage what Elop had failed to run into the ground -- the rump Nokia, a producer of telecommunications equipment.
Suri had been working to make this part of Nokia's business profitable since 2009, and those efforts paid off after he became CEO almost a year ago. In 2014, the slimmed-down Nokia earned 1.1 billion euros, about the same as in 2011 -- with its mobile phone unit still intact -- in Elop's first full year as CEO. Suri's Nokia showed a remarkable gross margin of 44.3 percent, better than Apple's 39.3 percent. The company's stock price reflected the success of his relentless concentration on the most profitable parts of the business, rising 37 percent since he was appointed to the top job.
So no wonder Nokia now feels strong enough for a major acquisition, one that has been in the cards since 2013, when the handset-business sale took shape. At that time, Nokia backed out of a link-up with Alcatel-Lucent, a communications equipment company that was undergoing a restructuring similar to the one Suri was conducting at Nokia. Alcatel was cutting costs, getting rid of businesses that sold wired communications equipment and concentrating on newer technologies, such as Internet routing, 4G wireless and cloud computing.
Yet it wasn't clear in November 2013, when Nokia stopped looking at the deal, how well Alcatel CEO Michel Combes was doing. Now it is. Alcatel, which had bled cash for years, is profitable again, with net income of 271 million euros in the last quarter of 2014. In the final two quarters of last year, Alcatel had positive cash flow from its operations for the first time since 2012.
It isn't a spectacular recovery, but it's been good enough to ensure that acquiring Alcatel probably won't be a major headache for the Finnish company. Now, all the 2013 talk of synergies between the two companies finally makes sense to corporate executives allergic to losses, not just to analysts playing chess with other people's money.
As always with French companies under President Francois Hollande's socialist government, a cross-border acquisition may be tricky -- it isn't clear whether Nokia will end up buying all or part of Alcatel's business. Whatever it succeeds in acquiring, however, Nokia -- still Finland's highest-valued company -- will become a strong national champion again. The combined 2014 sales of Nokia and Alcatel were, at $27.4 billion, about $1 billion more than those of Sweden-based Ericsson. Although this is still only 60 percent of the sales of U.S.-based Cisco Systems or China's Huawei, a combined Nokia-Alcatel would be up there with the global leaders.
The equipment industry sounds unexciting from a consumer standpoint, but that may change. In a February interview, Suri explained how he saw Nokia's future:
We believe in this programmable world - machine-to-machine, Internet of things. Ultimately, there will be billions of intelligent connections, there will be cloud-based connections, and there will be billions of connected devices. If you believe in this vision, location will be an important part of the future. We are trying to build a location-based cloud business.
This might require Nokia to keep its mapping business, called Here, whose sale it is now said to be considering. Even if the unit is sold -- perhaps to a company such as Apple, which is struggling with its own map application -- Nokia now has enough experience in reinventing itself that it won't soon crumble under the pressure of tech innovation again.
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