Nokia’s (NOK) has made a bid for US optical networking equipment manufacturer Infinera for US$2.3 billion. This puts the Finnish company on track to benefit from billions of dollars in investments in data centers to respond to the rise of artificial intelligence.
The deal would allow Nokia to overtake Ciena and become the second-largest supplier in the optical networking market, with a 20% share. That would put Nokia behind Huawei, which benefits from the minimal presence of Western companies in China.
Facing declining sales of 5G equipment, telecommunications equipment manufacturers are looking for ways to diversify their markets and focus on growing sectors such as AI.
Nokia’s move will allow it to sell more equipment to major tech companies such as Amazon, Alphabet and Microsoft, which are investing billions of dollars in building new data centers to support the rise of artificial intelligence.
“This is quite optimal timing for a deal of this nature as you are choosing the timing right before the market is expected to recover,” Nokia CEO Pekka Lundmark said in an interview with Reuters.
AI a major driver of investments
“AI is driving significant investment in data centers… one of the key attractions of this acquisition is that it significantly increases our visibility into data centers,” he said.
Data centers use optical transport networks: glass cables that transmit digital signals so that electronic devices can communicate with each other.
Infinera is particularly strong in intra data center communications, which refers to server-to-server communications within data centers. This will be one of the fastest growing segments in the overall communications technology market, Lundmark said.
Nokia shares rose 4% in morning trading, indicating shareholders are optimistic about the deal. Buyers’ stock price would typically fall due to dilution in a cash-and-stock deal.
Nokia, which is paying 70% of the purchase price in cash and the rest in shares, expects to save 200 million euros ($213.88 million) in costs after the deal closes next year.
While the purchase price may be somewhat steep given Infinera’s bumpy growth trajectory, the purchase price would be justified if Nokia could capture the EUR 200 million in synergies, said Mads Rosendal, an analyst at Danske Bank Credit Research.
Infinera gets about 60% of its revenue from the United States, while Nokia has a larger share in Europe and Asia. According to Lundmark, it is therefore a complementary transaction.
“The two companies together have combined sales costs of more than 2 billion euros and operating costs of more than a billion euros… so compared to that target, 200 million (euros) is not an extraordinary amount,” Lundmark said, adding that it so it was. too early to comment on possible layoffs.
($1 = 0.9351 euros)
(Reporting by Supantha Mukherjee in Stockholm; Editing by Ros Russell)
