Nokia's bid to buy US optical networking equipment maker Infinera in a $2.3 billion deal puts the Finnish company on track to cash in on the billions of dollars in investment pouring into data centers to meet the rise of artificial intelligence.
The deal would help Nokia overtake Ciena to become the second-largest vendor in the optical networking market with a 20 percent share, behind Huawei, which benefits from the minimal presence of Western companies in China.
Telecom equipment makers, struggling with lower sales of 5G equipment, have been looking for ways to diversify their markets and enter growth areas such as AI.
Nokia's move will allow the company to sell more equipment to tech giants such as Amazon, Alphabet and Microsoft as they invest billions of dollars in building new data centers to service the artificial intelligence boom.
“This is quite an optimal time for a deal of this nature when you estimate it just before the market is expected to start to recover,” Nokia CEO Pekka Lundmark said in an interview with Reuters .
“AI is driving significant investments in data centers … one of the key attractions of this acquisition is that it significantly increases our exposure to data centers,” he said.
Data centers use optical transport networks – cables made of glass that transmit digital signals – to allow electronic devices to talk to each other.
Infinera is particularly strong in intra-data center communications, which refer to server-to-server communications within data centers. This will be one of the fastest growing segments in the global communications technology market, Lundmark said.
Nokia shares rose 4% in morning trade, indicating shareholders are bullish on the deal. The buyers' share price would normally be reduced due to dilution in a cash and stock deal.
Nokia, which will pay 70 percent of the purchase price in cash and the rest in stock, expects to save 200 million euros ($213.88 million) in costs after the deal closes next year.
Although the purchase multiple may be a bit high as Infinera had an uneven growth trajectory, if Nokia could extract the €200 million in synergies, then the purchase price would be justified, said Mads Rosendal, analyst at Danske Bank Credit Research.
Infinera gets about 60 percent of its business from the United States, while Nokia had a larger stake in Europe and Asia, making it a complementary transaction, Lundmark said.
“The two companies together have combined cost of sales of over €2 billion and operating expenses of over €1 billion… so against that target, €200 million (€) it's not a particular stretch,” Lundmark said, adding that it was too early to comment on potential layoffs.
© Thomson Reuters 2024
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