Jun 30, 2024
Nokia, the Finnish tech giant, is set to buy US optical networking gear maker Infinera in a $2.3 billion deal. This acquisition could help Nokia surpass Ciena and become the second-largest vendor in the optical networking market with a 20% share, behind Huawei, which benefits from the minimal presence of Western companies in China.
This move allows Nokia to sell more equipment to tech giants, including Amazon, Alphabet-owned Google, and Microsoft, as they invest billions of dollars in generating new data centres to service the artificial intelligence (AI) boom.
Nokia CEO Pekka Lundmark stated, "This is pretty optimal timing for a deal of this nature when you are timing it just before the market is expected to start to recover."
“AI is driving significant investments in data centres — one of the key attractions of this acquisition is that it significantly increases our exposure to data centres," Lundmark added. Data centres utilise optical transport, which allows electronic devices to communicate with each other.
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Infinera is strong in intra-data centre communications, which involve server-to-server communications inside data centres. This is one of the fastest-growing segments in the overall communications technology market, Lundmark said.
Nokia shares increased by 4% in morning trade, signalling that shareholders are positive about the deal. The buyer’s share price would typically ease due to dilution in a cash-and-stock deal. Nokia is set to pay 70% of the purchase price in cash, with the rest in stock. The company expects to save 200 million euros ($213.88 million) in costs following the deal's closure next year.
While the purchase multiple might be somewhat excessive given Infinera's inconsistent growth trajectory, if Nokia can achieve the 200 million euros in synergies, the purchase price would be justified, said Mads Rosendal, an analyst at Danske Bank Credit Research.
Infinera gets about 60% of its business from the United States, whereas Nokia has a significant share in Europe and Asia, making it a complementary transaction, according to Lundmark.
"The two businesses together have a combined cost of sales of over 2 billion euros and operating expenses of over a billion euros, so against that target, 200 million euros is not a particular stretch," Lundmark said.
