Alcatel-Lucent Defensive about Nokia Deal

Set to be purchased by larger competitor Nokia, the telecom equipment maker Alcatel-Lucent improved their profit margins in the first quarter even though there was a marked slowdown in sales in the biggest market of the company, i.e. the United States. Although a net loss was reported, but the French firm was able to post a better quarter as opposed to mobile market leader Ericsson and Nokia and this was all because of a weak euro, higher software sales and a strong and steady demand for its internet routing products, which aid the telecom operators in handling heavy broadband traffic from online video.

There were steep drops in shares of both these competitors after they missed their profit targets and the misstep by Nokia prompted the shareholders of Alcatel to say that the terms of the takeover deal should be renegotiated. The chief executive officer of Alcatel-Lucent, Michel Combes, simply dismissed this idea on Thursday when he said that there wasn’t any need to make changes to the deal since both the companies are going according to their annual targets. He said that the deal had been made rationally and the performance of one isolated quarter was not going to have any impact on the terms.

According to analysts, there were significant divergence in the results as opposed to weak peers Ericsson and Nokia. The shares of the French telecom operator rose by 2.8% and reached 3.30 euros, which is quite a substantial gain considering the fact that they had fallen about 30% since the acquisition of the company by Nokia was announced in mid-April. This was primarily because there had been investor skepticism about the plus sides of the deal. However, the acquisition of Alcatel-Lucent by Nokia is aimed at putting the firm in a better position of competing with Sweden-based Ericsson as well as the Chinese low-cost powerhouse Huawei.

This can be accomplished if a strong number two is forged in mobile along with a complete product line. After the deal is complete, shareholders of Alcatel-Lucent will get about 0.55 shares in Nokia for every share in the French company and they will end up with 33.5% of the enlarged group in 2016 when the deal is finally closed. The first quarter revenue of Alcatel-Lucent grew by 9% to $3.68 billion or 3.24 billion euros and this was greater than the consensus provided by the company, which had been near 3.02 billion euros.

As far as the adjusted operating profit of the company is concerned, it almost doubled to 82 million euros even though the consensus had predicted that it would reach about 79 million. A net loss was posted by the company about 72 million euros, which was almost the same as 73 million loss the year before. Nonetheless, there was some improvement in measures of profitability because there were sales of higher margin software and products and there were also some cost cuts. The gross margin and top line were rather impressive, considering the weak spending in North America. 

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