Nokia capitalizes on AI boom with $2.3 billion acquisition of Infinera
Nokia’s $2.3 billion bid for US optical networking equipment maker Infinera will allow the Finnish company to tap into billions of dollars in data center investments to capitalize on 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 choose the timing just before the market is expected to recover,” Nokia CEO Pekka Lundmark told Reuters in an interview.
“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 carry 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 that shareholders are optimistic about the deal. The share price of buyers would normally 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 acquisition price may be a bit high given Infinera’s erratic growth path, it would be justified if Nokia manages to capture the EUR 200 million in synergies, said Mads Rosendal, analyst at Danske Bank Credit Research.
Infinera generates about 60% of its revenue from the United States, while Nokia has a larger share in Europe and Asia. According to Lundmark, this is therefore a complementary transaction.
“The two companies together have a combined turnover of over 2 billion euros and operating costs of over a billion euros. Against that background, 200 million euros is not that much,” said Lundmark, who added that it is too early to make statements about possible layoffs.
© Thomson Reuters 2024
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