Nokia to buy Alcatel-Lucent to grow in telecom equipment

Nokia is to buy Alcatel-Lucent in an all-share deal that values its smaller French rival at 15.6 billion euros ($16.6 billion), building up its telecom equipment business to compete with market leader Ericsson.

Nokia's takeover of Alcatel-Lucent will redefine a telecom equipment sector suffering weak growth prospects and pressure from low-cost Chinese players Huawei [HWT.UL] and ZTE.

The combined company will have about 114,000 employees and combined sales of around 26 billion euros.

In mobile equipment it will rank a strong second, with global market share of 35 percent, behind Sweden's Ericsson with 40 percent and ahead of Huawei's 20 percent, according to Bernstein Research.

The Finnish company will give Alcatel-Lucent shareholders 0.55 shares in the combined company for each of their old shares, resulting in 33.5 percent of the entity being in Alcatel shareholders' hands if the tender offer is fully taken up.

The deal will be finalized in the first half of 2016 and is expected to result in 900 million euros of operating cost savings by the end of 2019, the companies said on Wednesday.

The new Nokia will have stronger exposure to the important North American market, with key contracts with AT&T and Verizon and a fast-growing Internet routing business.

Nokia shares rose 3 percent at the opening, while Alcatel-Lucent fell 11 percent, reversing trends on Tuesday when the talks were first acknowledged by the companies.

Alcatel shareholders were disappointed because they hoped for a part-cash offer, whileNokia holders were relieved that the group had not overpaid, a trader said.

Nokia initially approached Alcatel-Lucent about buying only the wireless business but was rebuffed, leading to the broader deal, Alcatel boss Michel Combes told Reuters in an interview.

The deal carries significant risks, however. The track record of mergers in the sector - including the two that gave birth to Nokia and Alcatel-Lucent a decade ago - has been poor. Prior deals were plagued by the difficulty of cutting costs in an R&D intensive business, rivals stealing contracts while the companies were distracted by their integrations, and struggles over power within the married firms.

Nokia CEO Rajeev Suri sought to reassure by saying he had learned from the past.

"This is not a joint venture, so there will be no governance issues," he said on a call with investors.

"We will take a no politics, no nonsense approach to running the business, and have learned from past mistakes."