Nokia CEO Stung by Failed Mergers Speeds Alcatel Integration

After gaining control of French network-equipment rival Alcatel-Lucent SA in January, Rajeev Suri put his team at Nokia Oyj on a tight schedule: in just 90 days they had to hash out which products to keep and which to jettison.

September 15, 2016

5 Min Read
Nokia CEO Stung by Failed Mergers Speeds Alcatel Integration

By Pino Vallejo

After gaining control of French network-equipment rival Alcatel-Lucent SA in January, Rajeev Suri put his team at Nokia Oyj on a tight schedule: in just 90 days they had to hash out which products to keep and which to jettison.

While Nokia’s 48-year-old chief executive officer admits he’s no fan of indecision, “procrastinated discussions” and office politics, that pace was extreme even for the fast-moving world of technology. But Suri’s urgency had a purpose. He didn’t want to repeat the mistakes of past mergers at the two network suppliers that dragged on for years and led to billions in losses.

“The world does not wait for you,” Suri said in an interview at the Finnish company’s headquarters nestled in the forest outside Helsinki. “If you miss that window, then the customers diverge.”

The company that resulted from the $18 billion deal is jelling sooner than he expected, Suri said. In an industry beset by sliding revenue, time is truly of essence as he works to form a competitor to Huawei Technologies Co. and Ericsson AB — a global player whose products span wireless equipment, internet routing products, old-fashioned fixed lines, cable and cloud software.

“Are we there yet? Not fully, but I think we are absolutely, in the first nine months, talking a lot less about integration and talking a lot more about the next development steps of the company,” Suri said during the hour-long talk on Tuesday.

Nokia has raised its cost-savings targets and sped the timeline for their implementation — evidence, Suri says, that it’s becoming the company he envisions, with a balance of entrepreneurial drive, innovation, structure and discipline.

Not all signs are positive. Nokia’s second-quarter revenue dropped 11 percent on a pro forma basis as phone-carrier spending slowed. Customers in key markets such as the U.S. have largely built so-called fourth-generation networks, and the next round, dubbed 5G, isn’t ready for wide deployment. Industrywide wireless-network equipment sales are set to shrink 9 percent this year, according to Deutsche Bank AG.

The market malaise has led to a 25 percent drop in Nokia’s shares this year, while Ericsson has plunged 31 percent. The Swedish company ousted its CEO in July. Nokia traded 0.3 percent lower as of 10:10 a.m. in Helsinki on Thursday.

“Nokia is a good quality company but there are major risks,” said Mikael Rautanen, an analyst at Inderes in Helsinki who has a reduce rating on the stock. “The integration is going to take a couple of years — for now it’s better to stay on the sidelines.”

Suri, who describes his philosophy as valuing “pragmatism over perfection,” is guiding the latest incarnation for a 151-year-old company that has its origins in the paper industry, then moved into rubber boots and tires and ultimately became a household name for its mobile phones. Nokia dominated that market for a decade before succumbing to competition from Apple Inc. and Samsung Electronics Co., selling the handset business in 2014 to Microsoft Corp. for more than $7 billion.

Painful Effort

Suri, a native of India, says his decision-making is guided by experiences as a Nokia regional manager in Asia during the company’s painful effort to jointly operate a network venture with Siemens AG set up in 2007. The business posted losses for five years and only became profitable after Suri was promoted to head the JV and implemented a program to slash nearly a quarter of the workforce. Nokia eventually bought out Siemens in 2013 for 1.7 billion euros ($1.9 billion).

Alcatel-Lucent — created through a merger of Alcatel with U.S.-based Lucent Technologies — was arguably an even greater failure. The company accumulated more than $10 billion in losses after the 2006 combination as executive changes and restructuring efforts failed to restore growth.

Suri has sped along the current integration by limiting the team of people on the project to fewer than 100, versus the thousands he says were involved at Nokia Siemens. Nokia has raised the annual cost-savings target to 1.2 billion euros by 2018 from 900 million euros by 2019 when the Alcatel deal was announced.

“You want to be inclusive but you can’t be to the extent of having so many people involved that it slows you down,” Suri said. “We’ve seen this movie before. We have to learn from the mistakes of the past.”

Eliminating Jobs

The company plans to eliminate as many as 15,000 positions out of a combined workforce of 105,000, people familiar with the matter said in April. Suri, who declined to specify his job-cuts goal, says his long-term ambition is a double-digit operating margin. Last quarter, the adjusted return on sales at Nokia’s network business was 6 percent.

One tantalizing move for those nostalgic about the company’s glory days was the decision to allow a small Helsinki-based group to begin selling Nokia-branded mobile phones again. Suri is quick to say he approved the licensing deal for business reasons: it’s a revenue stream that didn’t require any financial investment.

Internally, naysayers told Suri his rapid timeline for product portfolio decisions that often take a year or more wasn’t possible. He barreled ahead anyway and met his self-imposed 90-day deadline. He has more plans in stock — he wants to spread quality programs, centralized pricing and continuous-improvement projects throughout the company, but he’s sensitive to forcing too much change at once.

“You accommodate in the beginning and, of course, then comes a time when you say, ‘There’s money on the table and we’re going to go get it,”’ Suri said.

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